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OUTLINES OF ECONOMIC THEORY 



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OUTLINES 



ECONOMIC THEOKY 



HERBERT JOSEPH DAVENPORT 



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THE MACMILLAN COMPANY 

LONDON: MACMILLAN & CO., Ltd. 
1896 



All rights reserved 



y\j«_^ 



V 



COPTKIGHT, 1S96, 

By the MACMILLAN COMPANY. 



NorioooU 3|rfss 

J. S. Gushing & Co. — Berwick & Smith 
Norwood Mass. U.S.A. 



PREFACE 

This book was not originally projected as a text-book, 
nor is it now directed primarily to teachers. In attempt- 
ing, however, to make it serviceable in his own work in 
the class-room, the writer has found it advisable to adopt 
the plan of suggestive questions as introductory to the 
various topics, and to follow the discussions with a wide 
selection of questions, serving in part as a review of the 
text and in part to indicate the bearing of the theoretical 
discussions upon subjects of current and practical interest. 
In so far as this method is well adapted to pedagogical 
needs, it can hardly fail to prove helpful to the indepen- 
dent reader. It has therefore seemed desirable to retain 
the text-book manner of presentation. 

For such teachers as shall make use of the book for 
class-room purposes, it is advised that the student be re- 
quired to bring to the recitation-room written answers to 
both the suggestive and the review questions. Answers 
to the introductory questions should be attempted before 
the text is appointed for study. 

HERBERT J. DAVENPORT. 



SUMMARY 



(References are to Sections) 



PAGE 

Introduction, 1-7 1 

Scope of the science, 1. 

Character of economic laws, 2. 

Economics a study of two terms, (1) man; (2) environment. 

Man tlie centre of the science, 5, 6. 
Law and freewill., 7. 

Wealth, 8-23 14 

Desires and utility, 8. 

Utilities external and internal, 10. 

Only external are wealth, 10. 

Moral questions irrelevant for this purpose, 9. 

Utilities exist (1) in superfluity ; (2) in scarcity. 

Only (2) are wealth, 11. 
Is material existence essential ? 12-17. 

"Wealth socially a sacrifice-commanding utility exterior to man- 
kind. 
Individually . . . exterior to individual, 12-21. 
A question of correspondence., 22 ; not necessarily a product 
of labour, 23. 

Economic Motive, 24-28 29 

Selfishness is not the first postulate, 25. 

The minimizing of sacrifice is the formula, 25-28. 

Value 35 

Desires are each satiable, 29, 30. 

Individual economics underlies social, 31, 32. 

Antagonism between utility and value, 33, 34. 

Value, how fixed — sacrifice for sacrifice, 35, 36. 

Method of fixation, 38. 

Value. Personal — the measure of sacrifice involved in obtain- 
ing or retaining utility, 39, 40. Market — this sacrifice as 
fixed in the market by marginal adjustments, 41. 

Value measures marginal relative utility = sacrifice, 41-43. 

vii 



SUMMARY 



PAGE 

Cost of Production ......... 50 

Restated as marginal producers^ sacrifice (a) possibly in effort; 
(&) commonly in possible products. 

Values exist apart from labour, but tend roughly to corre- 
spond, 46. 

Product measures value of labour, rather than labour, product, 
47-48. 

In what sense has labour value ? 49. 

Question how important, 50. 

Usual statement., 52 ; criticised, 53, 54. 

Criticism applied to (a) wages, 52 ; (6) interest, 59 ; 
(c) labour cost, 53. 

All economic forces resolved finally into demand, 54. 

Wages and Profits defined, 61-66 68 

Man and nature are factors, Gl. 
Profits and wages identical, 64, 65. 
Bislc, m. 

Rent, 67-91 . 75 

What produces the crop ? 67. 

Bicardiayi theory (1) stated, 68. 

(2) Modified — Enlarged conception of products, 72 ; mar- 
gin of usefulness, 73 ; origins irrelevant, 73 ; rent, 
wages, and interest are results — distributive shares 
— not causes, 82-91. 

Law of diminishing returns, 68. 

Rent and price, 69, 82-91. 
Monopoly aspects, 77. 

Law of rent is restatement of law of value, 78. 

Rent and population, 79 ; urban land, 80 ; single tax, 81. 

Population, 92-99 106 

Does cost of production apply to men ? 92. 

Evidence of Malthusian statement, 94, 95 ; contra, 96. 

1-5 there a law, 97, 98. 

Capital and Interest ......... 119 

Capital in two aspects — (1) individual ; (2) social. 
Some ambiguities, 101 ; credits and fiats, 102-104. 
Relations between (a) credit and savings, (6) credit and capital, 
105-107. 



SUMMARY 



PAGE 

Capitalization takes place mostly through credit system, 106, 

107. 
Capitalization not a question of existing wealth, 108. 
Interest. 

Advantages obtained by borrowers, 109-111. 

Interest is sacrifice made for these, marginally determined, 

114-117. 
Enlarged conception of income, 115. 
Bisk, 118, 119. 

"Wages, Pkofits, and Distribution ...... 143 

"Wages and profits vary with individuals, 120, 121. 
Relation of labour supjily to wages ; women's wages, 122. 
"What is starting point in wages problem ? 123-126. 
Imprenditors, 127. 

Their competition, 128 ; monopoly aspects, 129. 
Distribution, 130, 131. 

Tendencies of interest, 130 ; of profits, 131 ; of wages and 
profits together ; President Walker's theory examined, 
131. 

Minor Market Movements. Increasing Returns and Specu- 
lation, 132-136 168 

International Trade, 137-146 ....... 178 

Division of labour advantageous to nations, 137 ; a question of 

least sacrifices, 137 ; inertia of labour and capital, 140. 
Domestic competition the real danger to struggling industries, 

140. 
Protection under monopoly conditions, 142 ; as method of tax- 
ing the foreigner, 144 ; temporary stimulus, 145 ; effects on 
rents and distribution, 146. 

Combination and Monopoly, 147-154 ...... 201 

Laissez-faire and competition, 147, 148. 
"Where is the evil in combination ? 149. 
Theory of monopoly, 150. 
Limits of monopoly, 151. 
Purchasers' combinations, 152. 

Trades-Unions 208 

May they lower interest ? remuneration for risk ; profits on 

oppression of employes ; on adulteration, etc., 153. 
Conditions of success, 154. 



SUMMARY 



PAGE 

Taxation, 155-161 213 

Different formal rules examined, 155. 

Tax shifts only as demand and supply undergo readjustment. 

Therefore tax on ajiy form of rent does not shift, 156; on 

incomes does not shift, 156 ; on commodities, capital, or 

interest shifts in part, 156, 157. 

Shifting ceases when consumer is reached, 159, 160. 
Increasing and decreasing returns, 160. 

Bounties — benefits shift in part, 161. 

Currency, 162-212 224 

Fluctuation and inaccuracy inevitable over long periods, 162. 

Standard should follow utility rather than value, 163. 

Must take account of services, 164, and if possible of changing 

standards of living, 165, 166. 
Functions of currency, and necessary qualities, 167-169. 

All credits are protracted cases of exchange, 170. 

Need for money results from division of labour and is lim- 
ited by it, 173. 

Test of sufficiency, 173, 174. 

Value of Money, how fixed, 175-183 238 

Different kinds of currency — credit, commodity, and fiat, 184, 
185. 

Gkesham's Law, 187-192 249 

Increased supply loioers value of unit, 187. 

riat or credit issues therefore increase non-currency 

demand for commodity elements, 188. 
But outflow is unequal to inflow, 189. 

International Trade and Currency' ...... 256 

Foreign markets as related to currency movements, 190, 

191. 
Futility of local attempts at inflation, 192. 

Irredeemable currency, 193-202. 

Value of currency a question of demand and supply, and 
not of material, 193-201. But first issues are always ill- 
advised, 202. 

Bimetallism, 204-206. 

National, means alternations of monometallism, 204. 
International, could be made to succeed, 205, 206. 



SUMMARY 



PAGE 

Commercial Crises, 207-211 273 

A collapse in credit, 207, 208 ; not in lictitious prosperity, 

209. 
Advantages and dangers of credit, 210, 211. 
Expansion of currency as remedy considered, 212. 

Takiff Taxes and Prices 280 

Effects of tariff barriers on commodity and metal production 
and on prices, 213-217. 

ECONOMICS AS ART 

The Competitive System, 218-238 284 

The modern industrial era analyzed, 218-220. 

The Economic Harmonies, 221, 222. 

Laissez-faire as an ethical system, 223. 

Tendencies indicated by history, 22(3-228. 

Laissez-faire and socialism compared economically, 229, 230. 

Competitive production criticised, 231-233. 

Competitive distribution criticised, 234, 235. 

Competitive consumption criticised, 23(). 
Socialism generally, as remedy, 238-242. 

Co-operation and Profit-sharing, 243-246 315 

State and Mdnicipal Ownership, 248, 249 319 

Social Functions of the Rich, 250, 251 320 

Population and National Survival, 252-254 .... 324 

Birth-rates, Standards of Life, and Natural Selection, 252- 

254 326 

Fashion, 259-274 330 

Consumption and ethical standards, 259-2(51. 
Expansiveness of n.eeds as bearing on civilization, 262, 263. 
Standards and opinions of others, 264. 
Nineteenth century unrest, 265, 266. 
The cause, 267-274. 

Taxation, 275-283 344 

Applications of theory to income, vice, luxury, land, and inher- 
itance taxes, 275-281. 
Land tax, 282, 283. 



xii SUMMARY 

PAGE 

EiGHT-HOUK Day, 284, 285 350 

Apprentices, 286 .......... 351 

Sweating System, 287-289 351 

Labour of Women and Children, 290, 291 ..... 353 

Non-employment, 292-296 ........ 355 

Currency 360 ^ 

Fluctuation and panics, and different remedial proposals, 296. 

Commodity standard, 297. 

The ultimate evil, 298, 299. 

The imprenditor system and wages, 300-302. 

Bank issues vs. government issues, 303-307. 

International free coinage of silver; American free coinage of 

silver, 308-310. 
Injustice of the change, 311-313. 
Merits of silver as a standard ; statistics, 314-317. 



" La notion de la valeur est le fondement de toute I'^conomie 
politique, et ce n'est pas seulenient I'dchange, mais la reparti- 
tion, la consommation et la production elle-meme qui se ram§- 
nent, tant au point de "vue pureraent scientifique qu'au point de 
vue pratique, h des questions de valeur. Les traitfe d'dconomie 
politique pure ne sont que des traitfe sur la valeur." 

CHARLES GIDE. 



OUTLINES OF ECONOMIC THEORY 

CHAPTER I 

THE SCOPE OF THE SCIENCE 

Ask yourself some unanswerable questions about Electricity. About 
Light, Ether, a Elower, a Chair, a Dab of Mud. 
What does Tennyson mean when he says : 

" Elower in the crannied wall, 
I pluck you out of the crannies, 
Hold you here root and all in my hand, 
Little flower, — but if I could understand 
What you are, root and all, and all in all, 
I should know what God and man is." 

In what sense is it true that a perfect knowledge of any one fact is a 
perfect knowledge of all facts ? 

Mention some relations of Chemistry to Medicine ; of Geography to 
Botany ; of Mathematics to Physics ; of Geology to Zoology ; of History 
to Astronomy. 

From the point of view of how many sciences can you discuss a stick 
of wood ? 

1. Sociology may be broadly, though perhaps not very pre- 
cisely, defined as a study of man as a social being. Political 
Economy is a field of investigation inside soci- 
ology, and may be stated to be a study of man j^^^^ ^^^^^ ° 
in his commercial and industrial activities. This 
definition will not be found greatly helpful if attempt is made 
to apply it. The chemistry of farming, or the mechanics 
of weaving, hardly fall within the field of economic investiga- 
tion. But it is the murrain of definitions that, in about the 

B 1 



OUTLINES OF ECONOMIC THEORY 



degree that they get helpful and mentally tangible, they get 
inaccurate. No science is properly to be regarded as sepa- 
rated by any definite line of demarcation from all others. In 
some manner, more or less remote, all knowledge is related to 
all other. The field which any science covers is mostly a ques- 
tion of point of view. Men's commercial and industrial ac- 
tivities are in countless points of contact with questions of 
social morality and physical health; with questions of peda- 
gogy and jurisprudence; with chemistry, mechanics, and 
physics ; with law, politics, and medicine ; with physiology, 
sanitation, and dietetics ; with religion, criminology, and pe- 
nology. Geography is handmaid to transportation. Geology 
discloses the gold and silver mines. Astronomy may hide the 
secret of drouths and famines. 

Evidently enough we need a point of view, else Political 

Economy is not sociology merely, but sociology and a good 

deal more. Political Economy treats of the com- 

The economic mercial and industrial activities of men from the 
field. '' '' 

standpoint of values and markets. Law and re- 
ligion have place in Political Economy accordingly as they 
bear upon the production and distribution of the things 
which are bought and sold. Medicine, sanitation, and edu- 
cation are economic questions only as they bear upon the 
productive efficiency of the economic actor, Man. Vice and 
crime pertain to economic investigation, in so far as they are 
elements in the productive efficiency of society, and in the terms 
of security on which production takes place and effort is re- 
warded. Political Econom}^ is more than the science of trades 
and values ; but its horizon includes only what falls into view 
from this point of survey. 

2. Something also needs be said of the attitude of the eco- 
nomic investigator toward questions of morality and attempts 
Economics as ^* social amelioration. Is Political Economy con- 
science and as cerned with moral questions, or does it merely de- 
^^^- scribe conditions and analyze tendencies ? What 

is its function in the struggle of humanity towards a higher 
plane of living? Are its processes coldly scientific and un- 



THE SCOPE OF THE SCIENCE 



sympathetic, or is there some throb of heart and purpose in 
it ? What of the poor ? Can it help ? Would it if it could ? 
Is it dismal, or hopeful, or neutral ? 

Accordingly as one's point of view is theoretical or practical 
will the value of facts be differently estimated. To the scien- 
tific investigator they are valuable in the first instance for the 
inferences and tentative generalizations which they suggest; 
in the second instance, for the opportunity of testing by 
particular applications the correctness of the generalizations 
formed. Otherwise than as a basis for generalizations, or as a 
test of generalizations, facts have no value to the scientist. 

The attitude of the scientist, however, is a professional one, 
taking into consideration only one aspect of the value of know- 
ledge, and this aspect not the most important 
one. Science alone is not fruitful. If for the purpose of 
purposes of science, facts are valueless other- ^"^°<=6' 
wise than as the raAv material for principles and theories and 
generalizations, it is equally true that the systematizing and 
generalizing of facts which constitutes science is mere raw 
material for service to human welfare. Somehow and some- 
time the scientific law must fit into the business and practice 
of life in its moral, emotional, or bread-winning activities, — 
otherwise science has failed to justify itself. It is not its own 
excuse for being. It is held to a no less rigid account of itself 
than are harvest fields or orchard trees. '^ By their fruits ye 
shall know them." But it is the high peace of science to rest 
secure in the oneness of knowledge — to know that in the 
interdependence of all truth with all other, no fact stands 
dimly out of relation and verily unfertile for the needs of 
life. To the farmer his plough and to the weaver his shuttle. 
The scientist rightly pursues his search for truth with an eye 
single to its scientific import, since, for whatever he starts 
from cover, by some one and somewhere there will be found 
a place in the uses of living. 

Thus any object may be studied in its laws and principles, or 
in its applications to the well-being of society. Nor is it neces- 
sary that both lines of labour be performed by the same investi- 



OUTLINES OF ECONOMIC THEORY 



gator. Economics as a science deals with the general laws and 
tendencies concerning man as an economic actor. As an art, 
it deals with the application of these laws to the well-being 
of society. Science treats mostly of what is or tends to be. 
It is not greatly concerned to commend or to criticise, but 
to analyze, describe, and generalize. Art devotes itself to the 
practical outcome of the scientific laws, to questions of what 
may be and ought to be, and to the different processes of attain- 
ment. In the one aspect evil is treated as a fact to be studied ; 
in the other, as a wrong to be remedied. The bacteriologist 
best studies bacilli coldly, and the physician diagnoses disease 
unemotionally, writing no sentiment into his prescriptions. 
Sympathy has no great place in a hand-book on surgery. Yet 
the purposes of medicine are philanthropic, and the sick-room 
has its need of kindness. 

Suggestive Questions 

Discuss from your present outlook the correctness of the following 
definitions of Political Economy : — 

1. Eeflections upon the formation and distribution of wealth. 

TUKGOT. 

2. Researches upon the nature and causes of the wealth of nations. 

— Adam Smith. 

3. How the wealth Avhich satisfies the needs of societies is created, 
distributed, and consumed. — J. B. Say. 

4. The theory of the basis, the methods, and the laws of development 
of the prosperity of nations. — Kantz. 

5. The science of the production and distribution of wealth. — Mill. 

6. A study or inquiry concerned with the production, distribution, 
and exchange of wealth and services. — Sidgavick. 

7. A study of man's action in the ordinary business of life. 

— Marshal. 

8. The reasoned activity of a people tending towards the satisfaction 
of its needs. — Conrad. 

9. As science has for subject that part of the voluntary activity of 
men which applies itself to the production, appropriation, and consump- 
tion of wealth — As an art was long considered to be limited to a search 
for the conditions in which a people could most advance its wealth — To- 
day this purpose is confused with that of sociology viewed as an art. 

— Charles Benoist in Nouveau Diet. cfEconomie Politique. 



THE SCOPE OF THE SCIENCE 



The change in point of view is worth noticing. The early 
economists regarded the subject purely from the point of view 
of the state. Political Economy was one aspect of Kingcraft. 
The second conception was that of the study of wealth and 
man's relation to it. The third, tlie study of man in his rela- 
tion to wealth. 



THE CHARACTER OF ECONOMIC LAWS 

What is the distinction between the moral law and the civil law ^ 

Between the civil law and a law in Physics or Chemistry ? 

Is a law in Chemistry a force or in any sense a cause of things ? 

What do we mean when we speak of the planets moving in obedience 
to law ? 

Tell what you mean when you speak of the law of gravitation. 

What do we mean when we speak of nature providing, arranging, etc.? 

In what sense is the term law used in relation to statistics, prices, the 
course of things in history ? 

3. Too much is sometimes claimed for Political Economy as 
an accurate science ; and on the other hand too little is often 
allowed it. As the art of conducting affairs in their diversity 
and complexity, the applications are full of question, and are 
open to the charge of inexactness. There is a certain truth in 
the position of the historical school that each age demands its 
separate system ; that political economy is a matter of perpet- 
ual flux and change ; that there is no one economic science, 
that there are only economic sciences. This is correct enough 
if the subject is considered from the point of view of an art; 
and from the point of view of a science it is also true that 
Political Economy deals in a considerable measure with mere 
tendencies, and declares laws which are deduced from hypo- 
thetical cases and are true to the exent only that the hypotheses 
correspond to the facts of life. 

But whatever one may judge of the correctness of the laws 
at present declared by economic investigation, it is not open to 
doubt that man's relations to wealth, to the creation and dis- 
tribution of utility, will sometime be found to disclose in some 



OUTLINES OF ECONOMIC THEORY 



measure constant orders of phenomena. The advance of sci- 
ence is the discovery and proof of regular sequences in nature. 

The movements of the stars, the alternations of 
economic laws ? ^^J ^^^'^ nigl^t, the succession of the seasons, the 

currents of the sea and even of the air, have 
revealed a constancy in their order of occurrence, an invari- 
able following of one fact by another, a fixity of relation be- 
tween phenomena. It is quite possible that the laws to be 
observed in human affairs are more obscure — that often ten- 
dencies instead of definite measurable facts stand for one side 
of the constant relation. For example, a tendency of prices 
to rise after certain occurrences can be scientifically asserted, 
even though the rise has not taken place, and has perhaps 
been more than counterbalanced by some other tendency. 

4. In some degree prevision and prophecy are possible in 
human affairs. In this degree there are laws. If it is true 
that the human will is free, it is none the less true that the 
manner in which it will manifest its freedom can be predicted 
because of its regularity. There is no business man and no 
speculator whose conduct is not based upon the conviction 
that there is a regularity in social affairs ; no statistician who 
is not daily confronted with the proofs ; no historian to whom 
history is not full of illustrations. Marriages and suicides, 
as well as births and deaths, incendiary as well as accidental 
fires, all are capable of accurate prediction in totals ; and it 
would be strange if observation and analysis did not discover 
other orderly sequences of phenomena in the affairs of indus- 
try and trade. It is to a study of these sequences that Political 
Economy applies itself. 



MAN AND ENVIRONMENT 

1. Brilliant-plumaged domesticated doves set at liberty on an unin- 
habited island will revert to sober colours. Wliy? The cultivated 
strawberry set in the field changes to the type of the wild berry. Why ? 

2. Name such different elements or conditions of success in life as 
you can. 



THE SCOPE OF THE SCIENCE 



3. On what does the raising of a good crop depend ? 

4. In what sense, if any, do you helieve in luck ? 

5. Has a good chance in life much to do with success ? 
0. Why not raise bananas in Canada ? 

7. Could Shakespeare's plays have been written in the Sioux lan- 
guage ? Could they have been thought out in a Sioux civilization ? 

8. Are there any millionnaires in Patagonia ? Why ? Where are 
they found ? Why ? 

9. Mention such necessary conditions as you can to the prosperity of 
a great silk factory. 

10. Is an opportunity to get a good education to be regarded as part 
of yourself or as part of your surroundings ? 

11. When you have got the education, which is it ? 

12. Apportion the different elements in answer nine into two classes : 
First, those which are human in their character; second, those which are not. 

13. Apportion these elements into (1) those elements which pertain to 
the owner ; (2) those which pertain to his surroundings and opportunities. 

14. Describe the social conditions necessary to the existence of a 
great silk factory : (a) public tastes, (6) transportation, (c) machinery 
and mechanical skill, (d) motive power, (e) social security and morality, 
(/) laws, {g) international relations. 

5. We have seen that for humanity science means nothing 
unless it ultimately serves for human welfare. Thus even in 
those lines of investigation the farthest removed ^jjg interplay of 
from the direct study of man, man yet remains human and 
in some sort their centre and ultimate fact. All 
sociological studies, however, make him the object of their 
direct attention. The human race in its relations to its envi- 
ronment, and the individual of the race in his relations to 
an environment of which the other members of his race are 
themselves a part, are the subject-matter of all sociologi- 
cal investigation. Man, as one term of the science, is con- 
ceived as standing over against an outside world of fact and 
circumstance. He is neither entirely the master of his desti- 
nies, nor yet entirely the puppet of the forces by Avhich he is 
surrounded. He is himself a force — a centre of energy and 
activity. He is one of the facts in this complex interplay of 
human with natural energies. If he receives, he gives. If his 
environment rains its influences upon him, he puts forth his 



OUTLINES OF ECONOMIC THEORY 



own efforts in adapting self to environment, or environment 
to self. He strives and resists and reacts. George Eliot has 
put tlie case lielpfully when in supplement to the half truth, 
''Our deeds are fetters which we forge ourselves," she adds, 
" Ay, but I think it is the world that brings the iron." The 
history of human development is the story of what circum- 
stance has done for man, and man for circumstance — the 
incidence of outside forces upon him, and his reactions there- 
upon. There are thus two forces in the problem of history, 

— man and nature. The resultant is the direction of human 
development. 

This is not a difficult conception. It is one aspect of that 
which the biologists call the law of adaptation or of corre- 
spondence to environment. Life for each one of us is a 
question of what there is in us plus what is outside — of our 
powers and energies in face of our surroundings and oppor- 
tunities. Give Crusoe his island. What will he do with it ? 
This is in part a question of Crusoe, and in part a question 
of his island. Likewise for races the question is one, on one 
side of character and propensity, on the other, of surroundings 
and opportunity. 

6. It is unnecessary for the purposes of Political Economy 
to push the question into an inquiry as to which of these two 
forces of human development, if either, is the 
man as result ^"^ primary fact, and which the derivative. We may, 
for example, regard coral polyps as a product of 
the sea. It is none the less true that, once existing, they not 
merely suffer but work the processes of sea change. It con- 
stantly occurs that that which is result becomes in turn a cause 

— as for example, in chemistry, where a product of combination 
or decomposition itself furnishes the basis for a new series of 
chemical changes — or in physics, where in a row of blocks one 
falls as the result of an impact received, and by delivering its 
impact causes the next to fall — or where combustion liberates 
gases which themselves furnish material for further combustion. 

Economic science is not greatly concerned with the history 
of human development. So far as seems necessary the econo- 



THE SCOPE OF THE SCIENCE 



mist borrows his postulates in tliis regard from others of the 
social sciences without undertaking in his own behalf the labour 
of investigation. The main purpose of our immediate discus- 
sion is to fix clearly and definitely the first and perhaps the 
most important distinction in economic theory — the division 
of its subject-matter into the two terms, Man and Environment 
— the human and the non-human elements in the problem. 
Taking man as he is in relation to his environment as it exists, 
Political Economy treats of him in his commercial and indus- 
trial activities as viewed from the standpoint of markets and 
values. 

7. E-egarding Man as the centre of economic science, Politi- 
cal Economy becomes in one of its aspects a system of special 

psychology, — a generalization of the influences 

T . T , , T , . . , . Are economic 

which bear upon human volitions m certain or- j^ws consistent 

ders of phenomena. Preference and choice and with freedom of 

f ■ ,1 J. • 1 J? j-r • the human will ? 

desire are the very raw material of the science. 
Man's relations to his surroundings can then be rightly known 
only when he, the most important term, is rightly known. 
How comes it, then, that Man with his whims and hates, his 
antagonisms, his desires and his fears, his weakness and his 
strength, should furnish the basis of a rational science ? Are 
men not free ? How, then, can their activities be reduced to 
law and made the subject of orderly prevision ? How can the 
adequacy of causes and the inviolability of law be made con- 
sistent with freedom of choice and the self-determined character 
of human actions ? If men are mere results, each thought 
and act the necessary outcome of preceding states, where, then, 
is human freedom ? And if human freedom holds, where is 
the place for law in human affairs, the room for generalization, 
the basis for science ? It is idle to deny that for some purposes 
and in some lines of investigation the case presents a difficulty. 
But just as Political Economy is not concerned with the courses 
of human development, bat only with men as they are, so it is 
not concerned with the origin and derivation of choice. Men 
do choose. To this extent at least they are free, that they can 
and do follow their choices, — in truth, they cannot do other- 



10 OUTLINES OF ECONOMIC THEOEY 

wise as long as choice governs act. It may be that the sheer- 
est sort of fatalism lies back of choice. It may be that motives 
are causeless, undetermined, facts of sheer hazard. But they 
are. Our freedom lies in our ability to follow them. If fatal- 
ism holds, character is one term of fate. We are concerned 
with human character as it is, — with the simple fact that men 
follow their choices, and with the influences which bear upon 
these determinations. 

Suggestive Questions 

Do you like peaches ? How came you to like them ? 

How came you to have two hands instead of three ? 

What can you do ahout these facts ? 

Can you do all things which you choose to do ? 

Can you try ? Can you get anything in the way of results ? 

Can you deliberately act contrary to your choice ? 

Are you master of your preferences and choices ? 

Whence come they ? 

Are you free to follow them ? 

To what zones is civilization mostly confined ? Why ? 

Where did it originate ? Why ? 

In what direction, north or south, has it moved ? Why ? 

What physical reasons can you find for the lead which Western Europe 
has taken in civilization ? 

What is the trouble with the poles in this regard ? With the tropics ? 
In (a) human needs, (&) ease of satisfaction ? 

Will the human race ever come to do well where the snow never falls ? 
Why ? Buckle's History of Civilization, Vol. 1, Chap. 2, is suggestive on 
these questions. 

In what sense are there economic laws ? What are economic laws ? 



NOTES 

The influence of soil and climate is often preeminent. With regard 
to silver or copper, for example. Chili has a productive power infinitely 
greater than that of Erance or England. But as to porcelain, France 
has the advantage ; and likewise each country has certain products 
which it could obtain, supposing equality in skill and energy, with less 
of effort than the others. But often again the superiority in productive 



THE SCOPE OF THE SCIENCE 11 

power depends upon superiority in skill or in energy in a particular 
place. If, for example, North America has larger productive power as 
to cotton than have other countries, such as India, Brazil, Algeria, or 
Peru, it is only because America has applied, and does daily apply, to 
the culture of cotton as raw material more skill and energy than this 
or that other people. 

— Courcelle-Seneuil, France, translated from Traite d'Economie 
Politique, 3"^^ Edition, Tome 1, p. 120. 

Notice that all social progress is attended by an increase in the confi- 
dence of men in their neighbours, which, as we have already remarked, is 
the ultimate fact in cooperation. Every decrease in social progress man- 
ifests itself in diminution of this confidence. Note, likewise, that observ- 
ance of moral precejjts relative to the duties of man towards himself, 
favours the growth of his muscular powers, and that observance of moral 
precepts relative to the duties of each man towards his fellows, concurs 
in increasing productive forces, and in consequence increases the wealth 
of society by a better application and wider extension of progress. This 
is a fact which suggests a multitude of reflections. . . . Customs and 
institutions are more favourable to production as they distract men less 
from productive labour, either to insure the safety or the preservation of 
the riches which labour produces, or to devote themselves to idleness, 
vanity, and ostentation ; they are less favourable as they demand a 
larger expenditure of force in those quarrels and contests, whether war- 
like, judicial or otherwise, which make up, so to speak, the general ex- 
penses of society. 

— Courcelle-Senbdil, France, Traite cVEc. Pol., T. 1, p. 115. 

"We must first distinguish labour which is put forth only on terms of 
continued effort from art (industrial knowledge), the product of an earlier 
effort, thereafter furnishing to man a gratuitous help ; labour, limited by 
the purely material conditions in which it acts ; art, whose limitations 
no one knows ; labour subjected to the law of numbers, from which no 
part can be taken without decrease of the aggregate; art which escapes 
from the law of numbers, and is not at all decreased by the uses and 
applications to which it is put ; in a word, the material element and the 
spiritual element in the productive powers which man has in himself. . . . 
Analysis shows us clearly the nature of that which is sometimes wrongly 
termed immaterial or moral or personal riches like health, virtue, in- 
telligence, etc., generative forces — causes of wealth, but not wealth 
themselves. — Courcelle-Seneuil, Traite d'Ec. Pol., T. 1, p. 117. 

Suppose two societies equal in all respects with one exception : in 
one industrial effort is respected, in the other despised ; in one social 



12 OUTLINES OF ECONOMIC THEORY 

institutions encourage industrial education by honouring those wlio give 
or receive it ; where families are energetic in procuring for children this 
education, and w^here government fosters it ; in the other no attention 
is given to this instruction, no thought devoted to the manner in which 
it is given or received ; where the young, sinking into natural slothful- 
ness, make no endeavour to learn, and receive no stimulus from either 
the state or their families, where they are brought up in disdain of in- 
dustrial effort. Is it not evident that the first society will manifest 
larger productive power than the second ? 

Suppose, again, two societies equal in all respects with one exception : 
in one the laws and customs which support the ownership of wealth are 
generally respected ; in the other they are not. In the first, for exam- 
ple, each man honours the obligations which he has undertaken, fulfils 
them in good faith without deceit or fraud — the seller delivers exactly 
that which he has sold, and the buyer pays the price punctually ; the 
wage-earner makes no attempt to deprive the employer of some share 
of his due, the employer none to cheat his employ^ of a part of his 
wages ; the laws, the courts, and the system of administration favour 
these excellent characteristics ; in the second society, obligations are 
undertaken carelessly without great thought for their fulfilment, and 
when the time comes to meet them, there are found in public opinion, 
and in the laws, and through the courts, a thousand oi^portunities to 
escape their consequences — where all sorts of frauds are practised to 
escape from obligations and to profit at the expense of another. It is clear 
that this second society will possess less productive effectiveness than 
the first. 

Suppose two societies equal in all respects with one exception : in 
one, men unite willingly in interests and efforts ; they attempt to render 
their cooperation in production ever closer through well-managed associa- 
tions, since each appreciates the tie which binds his own interest to the 
general interest. In the other society, on the contrary, the general opin- 
ion is antagonistic to association ; there are w^anting confidence and 
esteem for one's fellows, and human relations fail in necessary tolerance ; 
personal interests are harsh, impatient, and blind, vanity extreme and 
sensitive, so that if associations are formed they rarely succeed. This 
second society will put forth less of productive power than the first. 

— Coukcelle-Seneuil, Traite d'JEc. PoL, T. 1, p. 111. 

Take an example, the trade of the pin-maker : a workman not edu- 
cated to this business (which the division of labour has rendered a distinct 
trade) , nor acquainted with the use of the machinery employed in it (to 
the invention of which the same division of labour has probably given 
occasion), could scarce, perhaps, with his utmost industry, make one pin 



THE SCOPE OF THE SCIENCE 13 

in a day, and certainly could not make twenty. But in the way in which 
this business is now carried on, not only the whole work is a peculiar 
trade, but it is divided into a number of branches, of which the greater 
part are likewise peculiar trades. One man draws out the wire, another 
straightens it ; a third cuts it, a fourth points it, a fifth grinds it at the 
top for receiving the head ; to make the head requires two or three dis- 
tinct operations ; to put it on is a peculiar business ; to whiten the pin is 
another ; it is even a trade by itself to put them into the paper. And the 
important business of making a pin is, in this manner, divided into about 
eighteen distinct operations, which in some manufactories are all per- 
formed by distinct hands, though in others the same man will sometimes 
perform two or three of them. I have seen a small manufactory of this 
kind, where ten men only were employed, and where some of them con- 
sequently performed two or three distinct operations. But though they 
were very poor, and therefore but indifferently accommodated with the 
necessary machinery, they could, when they exerted themselves, make 
among them about twelve pounds of pins in a day. There are in a pound 
upwards of four thousand pins of middling size. Those ten persons, 
therefore, could make among them upwards of forty-eight thousand pins 
in a day. Each person, therefore, making a tenth part of forty-eight 
thousand pins, might be considered as making four thousand eight hun- 
dred pins a day. But if they had all wrought separately and independ- 
ently, and without any of them having been educated to this peculiar 
business, they certainly could not each of them have made twenty, per- 
haps not one pin in a day ; that is certainly, not the two hundred and 
fortieth, perhaps not the four thousand eight hundredth part of what 
they are at present capable of performing, in consequence of a proper 
division and combination of different operations. 

— Adam Smith, England, Wealth of Nations, Book 1, c. 1. 



CHAPTEE II 

UTILITY AND WEALTH 

Is food wealth ? 

Is the strength which comes from it wealth ? 
Is medicine wealth ? 
Is whisl^ey wealth ? 

Accurately speaking, can one's face be one's fortune ? 
Suppose that A devotes a year to clearing the land for a farm ; 
B to constructing a locomotive ; 

C to perfecting an invention, or an industrial process ; 
D to the study of a profession : — 
Are intellectual acquisitions wealth ? 

Is health wealth ? eyesight ? a good voice ? strong muscles ? our in- 
herited characters ? our digestive apparatus ? our bodies ? our minds ? 

8. The Frencli economist, Gide, neatly observes that the 
concern of the economist is with the wants of men — of the 
The scope of de- l^^je^'? ^^i^h his rights — of the moralist, with 
sire and the his duties. Man is a creature of needs and 

nature of utility, ^lesires. Primarily, and as a condition to his 
mere existence, he requires food, commonly, also, clothing 
and shelter. He has appetites for art, music, philosophy, 
cigars, and vice. He desires comforts and luxuries, — pro- 
tection from the violence of nature, — from the wrongs of 
men, — and from the attacks of beasts and microbes. He 
■wants his steak broiled and his clothes brushed. He likes to be 
preached to and sung to. He wants books and boats, and race- 
horses, laces, parks, theatres, and eyeglasses, chairs, balloons, 
railroads, panoramas, fortune-tellers, phrenologists, and hum- 
bugs. In a secondary way he wants the machines and inven- 
tions and tools and processes by which his primary wants are 
helped towards satisfaction. Look at the price-currents, the 

14 



UTILITY AND WEALTH 15 

tariff schedules, the inventories of stocks in trade, or the adver- 
tising pages of the daily paper, and you get some suggestion of 
his manifold desires. He wants also love and pity and respect 
and place, and sometimes these also are bought and sold upon 
the market. All these things he wants because they minister 
to his desires — that is to say, because they are, in his think- 
ing, useful to him. The one characteristic common to all ob- 
jects of human desire is this quality of service to a human 
requirement. This attribute of serviceability we term utility. 
Put in another phrase, utility is desirability in relation to a 
person who desires. The thing or fact possessing this attribute 
of utility we call a good. 

There is need to get this concept of utility clearly in 
mind. First, it must be remarked that in ultimate analysis 
utility is necessarily a matter of service to individuals. Things 
are not desired by men classwise, but by men as units. That 
which is greatly desired by one man may be not at all desired 
by another. 

Again, the commendable character of the desire in question, 
or the good sense of its satisfaction, is not suggested in the 
economic use of the word "utility." Men put forth efforts and 
undergo privation for the possession of whiskey, cigars, and 
burglar's jimmies, as well as for food, or statuary, or harvest 
machinery. 

9. It is unjustly charged, however, that in the view of the 

economist evil and right living stand together and in equality 

of respect, and that there is no distinction for 

. . . As art political 

economic purposes between virtues and necessi- economy regards 

ties on the one hand, and luxuries and vices on t^e moral quaii- 
the other hand. Once more, economics is a science 
as well as an art. The economist did not make the world. 
On one side his province is to advise and help. On the scien- 
tific side it is to describe and study. On neither is it to lie or 
to palter. While men are influenced by evil purposes or by 
ignorance to buy and sell foolishness and evil, so long the 
student must recognize these desires as economic facts and 
the commodities as of market standing. At any rate, whether 



16 OUTLINES OF ECONOMIC THEORY 

we like it or not, the term " utility " in the terminology of the 
subject points merely to adaptability under conditions of desire 
or want to human desires. 

10. A distinction must always be drawn between those 
things in the outside world which are useful to men, and those 

„ ^ ^ ,^ things which in iiltimate analysis are a part of 
Goods are both ° . , 

external and man himself. This distinction, sometimes work- 
internai. ^j^g q-^^ ^-^ seemingly arbitrary results and occa- 

sionally causing considerable perplexity, is fundamental to the 
subject and must be firmly held in thought. 

Useful facts must be divided into two classes. Bread, for 
example, is clearly enough an outside good — an external fact 
appropriate for human needs. When it is eaten, we say 
that it is consumed. It no longer exists as bread. Its service 
is rendered in maintenance of life or increase of strength. 
But how shall we conceive of this result, this strength ? In 
the primary division of economic facts into man and environ- 
ment, does strength fall into one classification and bread into 
another ? The thing was bread. It is now life or strength. 
Is it now something possessed by man or is it ]part of the 
term Man? Is it subject or object, possessor or j)Ossessed, 
Man or environment ? 

Man is the beginning and the end of productive effort. The 
creation of utility is purposed by him for his consumption. 
He puts forth effort that he may enjoy its re- 
Are internal -wards. The economic cycle begins and ends in 
goods wealth ? . . 

him. He works that he may live. He is the 

producer and not the thing produced. The more strength, the 
better producer — later, the larger product ; but the strength 
is not product. So the mixtures prepared by the chemist, and 
the doctor's com]DOunding of medicinal gums, fall within the 
class goods, while your good health to resist contagion, and my 
good sense to avoid it, are ranked as human attributes. 

Let it be noted, however, that while the knowledge which 
avoids disease is to be conceived of as a human attribute and 
only in a secondary and half-figurative sense as a good — the 
outside fact from which this knowledge is obtained, the book 



UTILITY AND WEALTH 17 

or tlie advice of a physician, is a good. The mental power of 
the physician — his knowledge — is the source of his ability to 
do a useful thing — to speak a word or write a prescription 
which shall be of service to another human being. This know- 
ledge is a part of the physician's equipment for the production 
of useful things. When this equipment shall come to service, 
the result will be a good. As equipment, however, it is not 
utility or good, but physician. 

The full bearing of this distinction and the importance of 
it will become clearer in the following discussion of wealth. 

Suggestive Questions 
Define utility. 

Wliy is not knowledge wealth ? 
Are all outside goods wealth ? 
Must there be some degree of scarcity ? 
How about services ? What is the line of distinction ? 
If useful things must be in some degree of shortage to constitute 
wealth, is wealth a measure of well being ? 



WEALTH— Continued 

11. The useful things external to man — goods — are in part 
those which come without effort or sacrifice, — which are freely 
at the disposal of all who desire them. Air and water, for 
example, are of infinite usefulness to men, but are commonly 
at hand in so large supply that they are obtained without 
effort or sacrifice. So, for the most part, of the advantages 
derived from climate, or from the laws, institutions and social 
organization which are a part of civilization. On the other 
hand, there are goods which are characterized by a greater 
or less degree of scarcity relative to the demand for them. 
When utility and scarcity concur, the phenomena of values 
and prices emerge. 

But we are not yet prepared for a discussion of value, or 
even for a definition of it. Clearly enough the things of util- 
ity which are in surplus do not get bought and sold. Political 



18 OUTLINES OF ECONOMIC THEORY 

Economy has small concern with them — otherwise than to 

make them as numerous as possible. Our reasonings will be 

mostly occupied with the things which are attained through 

effort and struggle, and which upon the market are bought 

and sold at a price. 

12. It is commonly said that all useful things of value are 

wealth. This statement requires considerable explanation if 

it is to stand as accurate. If all things of value 

Immaterial utiii- ^^^ wealth, it remains true that there are many 

ties — services. ' ^ 

cases of value which do not fall within the 

meaning of the word " wealth " as used in Political Economy 
or in common speech. For example, when we have decided that 
the medical learning of the physician is not wealth, but is a 
human attribute, and that his activity is not wealth, but labour, 
what shall we say of the service which results from his ac- 
tivity ? Wealth is paid in exchange for this vitility. In what 
essential regard, then, does the result differ from wealth ? It 
is not final that it is not fixed and embodied in matter. In a 
certain sense all utilities are dependent on matter, since any 
satisfaction must reach the consciousness by the intermediary 
of the senses, and the senses are affected only by material 
means or causes. But if the philosophical or unphilosophical 
distinction is to be allowed between the material and the 
immaterial, it must be admitted that the important character- 
istic of the picture or book is not the matter. 

The fact which distinguishes services from wealth as popu- 
larly conceived is the difference in permanency. Consump- 
tion and production take place at the same instant. The 
services of the singer or actor are not wealth before they are 
rendered (though from the individual point of view the right 
to have them — the ticket — is wealth) nor after they are 
ended. Services cannot be hoarded or capitalized as such. 
This is an important distinction, and taken in connection with 
the departure from common speech involved in including ser- 
vices in the term "wealth," justifies the adoption of the estab- 
lished economic term " services," as indicating a particular sort 
of valuable utility. 



UTILITY AND WEALTH 19 

13. We have seen that the class of things called valuable 
subdivides into wealth and services — the principle of sub- 
division being the question of whether the given . , 

. . . Do material 

utility is or is not incorporated in some material existences fur- 
basis. We have now to observe how unimpor- nish any measure 

„ , , ,. , , .,,.,. of wealth? 

tant, and m tact how questionable, is this basis 

of distinction for other purposes than convenience of clas- 
sification. To say that the wealth of the world is the sum 
of all material things that are valuable would seem to be 
wide enough. An account which should include all lands, 
houses, furniture, books, cattle, tools, machinery, goods in 
stock, money, merchandises in the possession of consumers, 
etc., would strike one as exhaustive. But to measure wealth 
in any degree in terms of material existence is misleading. 
There is no more matter in the world at present than a thou- 
sand years ago, but matter has been modified better to answer 
human needs. The house which was mere clay or stone, the 
cloth, the material for which was not grown but was in the 
earth or in the air, are now wealth to mankind. Work pro- 
duces no new matter, no new forces. The applicability of 
matter and force to human uses does change. The iron in the 
earth, mined, melted, freed from impurities, hammered and 
flattened, forms a pocket knife. Nothing has been added to 
the matter of the world. Something has been added to the 
wealth. 

14. No limit can be assigned to the possible increase of 
wealth, by reason of the development of the human race in 
knowledge, skill, and desire. We shall meet 

this fact again in our discussion of the law of aUh^^"^^ ° 
increasing returns. "Of the one hundred and 
forty thousand species of vegetable life, we find only three 
hundred of sufficient value to cultivate ; and of the thousands 
of species in the animal kingdom we make use of but about 
two hundred." (De Can dole.) 

There are two as^DCcts of the truth which we are considering. 
Whatever adds to man's knowledge normally tends to add to 
the utility of the outside world to him. But also it is true 



20 OUTLINES OF ECONOMIC THEORY 

that man himself develops new needs and desires as well as 
greater intensity of needs and desires. Thus objects which 
answered to no human desire now take on the character of 
wealth, and that which was before wealth is now greater 
wealth by its service to stronger desires. 

15. Since wealth is found in the relation to man of the things 
outside man, there are in the relation two essential terms — 

the object to be enjoyed (used) and the capacity 

The lines of to enioy (use). Thus wealth develops along the 

increase. j j \ / i o 

two lines : first, of changes which man impresses 
upon outside nature in making it more fit to his uses ; second, 
of changes in the nature of man in strength, in knowledge, in 
desires, by which he becomes better able to make use of the 
outside world. For example, one who has a cigar, and can do 
nothing with it, lacks one of the essentials of Avealth. So a 
book is not wealth to a savage. That a mineral may become 
wealth there must be a human use to which it may be put, an 
ability to mine it, and a knowledge to adapt it to use. The 
fallacy which underlies the terms " intrinsic value " and " intrin- 
sic utility " is evident. Usefulness is a relation rather than a 
quality. 

It thus becomes evident enough that the sum of material 
existences is no measure of wealth. It should again be noted 
that it is no part of the argument to show that knowledge, 
strength, taste, and desire are in themselves wealth. They 
are merely part of one term of the relation of which nature is 
the other term. They belong to the term Man. 

16. AVe therefore turn to the reassuring fact that economic 
science is not greatly concerned with the metaphysical diffi- 
is the notion of ciilties which surround the concept of matter, 
matter important That a Certain very respectable body of philoso- 
in our science . pliers deny the existence of matter as conceived 
by the human mind, or regard matter as a manifestation of 
force, thereby implying that there exists no ultimate ground 
of distinction, does not fundamentally disturb a science which 
deals with utilities only, and uses the terms ''material" and 
" immaterial " but as conveniences of classification. So far as 



UTILITY AND WEALTH 21 

the economist is concerned, it is sufficient that the somewhat in 
question satisfies certain needs and desires of men. It may do 
this by warming liim — a certain effect on certain surface nerves 
— by pleasant excitations through eyes, nose, mouth, or ears — 
by an appeal to the emotions — to the love of art or of music 
or even of abstract truth. 

17. "We are to remember, then, that man's power over matter 
or force is that of use simply — of re-combination or re-dis- 
tribution. To say that a nian owns a piece of land is no more 
than to say that he has certain rights in and over it. If he 
has all rights, he is complete owner. If he has most of them, 
he is owner subject to easements, franchises, liens, etc. In 
such cases there are essentially coowners. Wealth is to be 
computed not by the objects of ownership, but by the number 
and quality of uses which these objects permit and to which 
they are put under given social conditions. 

Suggestive Questions 
Are eyes wealth? eyeglasses ? 

What do you mean by intrinsic or extrinsic utility ? 
By intrinsic or extrinsic value ? 
Are charms and relics now greatly prized ? 
Have they changed their intrinsic quality ? 
Are colour and weight intrinsic qualities ? 
Did Niagara roar before there were ears ? 

Is heat a quality of an outside thing, or a mere effect on consciousness ? 
Is the difference in value between winter and summer ice an intrinsic 
or extrinsic matter ? 

Why not call singing wealth ? acting ? preaching ? 

A dog has been trained to guard sheep : — 

Is there an increase in wealth ? Is it a material or immaterial increase ? 

Is the ability to sing wealth ? 

What is matter ? How do you know there is any ? 

What is an atom ? 

Define services. Why not call them wealth ? 



WEALTH FROM DIFFERENT POINTS OF VIEW 

18. The student has probably remarked that the term 
" wealth " stands for no very definite or accurate concept. It 



22 OUTLINES OF ECONOMIC THEORY 

points simply to material things of commodity-nature, value- 
bearing, material facts, and has seemingly no relation to the 
degree or amount of value. It indicates merely the junction 
of utility with scarcity. 

But we have now to analyze some modifications in the mean- 
ing of the term corresponding to various points of view in its 
application. 

19. Most men if asked to estimate their wealth would expe- 
rience no difficulty in the method. Each, after listing all his 
Individual point iii^terial property, would add his stocks, bonds, 
of view. Credits mortgages, rights, franchises, and claims of dif- 
and rights. ferent sorts, and his money in hand. He would 
make as a list of offsets the debts he owed and the different 
sorts of liabilities to which he was subject. These matters of 
claim and demand would occupy a considerable place in his 
schedule. But evidently that which he adds to his wealth as 
due him must be subtracted from the wealth of somebody else, 
and vice versa. Por every credit there is a debit. In estimating 
social wealth these claims must be cancelled. They are proper 
items in the individual reckoning, and are proper items in a 
national reckoning so far as they are against another nation. 

There are, then, increases or decreases in individual wealth 
which are irrelevant to the total social wealth. These are 
mostly if not entirely cases where men's relations to each 
other are immediately involved — as, for example, patents and 
copyrights, rights of goodwill in business, and in general all 
claims against one man in favour of another. 

20. It deserves notice here that from the point of view 
of the individual, the line of separation between goods and 
wealth is hard to draw. Men commonly estimate their pos- 
sessions with strict regard to exchange power and 

weaith'^*°"^^ market values. Wealth, being at the best in large 
degree relative, those goods which are common 
to all members of society are readily omitted from the reckon- 
ing. But obviously the advantages of social life, the institutions, 
the religion, and the science of the civilization into which each 
of us is born, are infinitely important. Yet it falls out rarely 



UTILITY AND WEALTH 23 

that we are more than obscurely conscious of this. These ad- 
vantages come to us as matter of course for the most part — 
unobtrusively and inevitably. They are commonly unincum- 
bered with conscious effort or sacrifice. And yet in fact social 
life imposes upon each of us its obligations and limitations. 
The liberty of each suffers that there may be liberty and safety 
for all. Men move from place to place or from country to 
country in search of better schools, better society, better levels 
of social intelligence or morality. The differences in the market 
values of city property are mostly explicable only as a buying 
and selling of social advantages. We occasionally make great 
sacrifices in order to obtain or retain these advantages. All 
men would ordinarily make such sacrifices, were enjoyment de- 
pendent thereon. That is to say, these opportunities of social 
life are valuable (admit of being valued) to each one of us. 
When the question is sharply raised we know it, as when our 
religious feelings are aroused we devoutly recognize it. 

21. AVithin the concept of wealth from the social point of 
view must be placed the different forms of government prop- 
erty — buildings, records, railroads, postal and 

telegraph plants, streets, sewage and water sys- ^^ ^^^^^ ^°^^ 
tems, etc. But a difficulty arises parallel to 
the one just examined with reference to individual wealth. 
What shall we say of rivers, seas, and climate — in a word, 
of the race or national habitat ? From the social point of 
view these advantages must be regarded as goods. Many a 
people would gladly buy a climate if it could, and makes for 
itself substitutes for humidity by expensive methods of irri- 
gation. Nations Avar for possession of these natural advan- 
tages ; entire communities, e.g. those of summer and winter 
resorts, derive their wealth from these advantages, and in 
some cases the exchange value of real property consists of 
practically nothing else. 

22. The factors entering into the production -wealth a ques- 
of goods, other than the factor man himself, ^^°^ °* *^°"^~ 
must be found in the nature of his environment 

— in the elements, in the varying conditions of temperature, 



24 OUTLINES OF ECONOMIC THEORY 

rainfall, sunshine, humidity, healthfulness, etc., in the soil, 
or more widely in the land, in its fertility and workabil- 
ity, its mineral resources, its accessibility to industry and 
commerce, in the varying sum of natural forces more or less 
Avithin the control of man, such as winds, tides, electricity, 
gravitation, and steam. This enumeration is doubtless incom- 
plete and inexact. Climate cannot be definitely distinguished 
from winds, electricity, and light; nor can natural forces be 
treated apart from questions of navigation and accessibility to 
commerce. Light which may be utilized as a natural force for 
power, or for the purposes of chemistry or art, is from another 
point of view an important factor in the fertility of the soil. 
But it is essential merely to hold in mind that wealth depends 
on the correspondence of two factors : first, man himself; second, 
the conditions surrounding him. He may in a large degree 
modify surrounding conditions. But it will still remain true 
that the arctic regions and tropical deserts do not offer favour- 
able conditions for the exercise of his wealth-producing activ- 
ities. He may adapt himself, in a manner, to an unhealthful 
climate ; but also in a measure, an unhealthful climate must 
exercise an unfavourable influence on his powers. Though he 
may make for himself artificial lines of communication, yet 
rivers, lakes, and seas will preserve an economic importance 
for this purpose. He may subsist, making small use of the 
opportunities offered by natural forces, but it will remain true 
that in these rest the possibility of greatest economic efficiency 
and the widest field for economic progress. 

23. We are now in position to discuss the vexed question 
of the origin of wealth. Is the position defensible that all 
Is wealth always wealth results directly or indirectly from labour ? 
a product of Certainly some wealth results from labour in 

labour? ^j^^ added utilities which are impressed upon 

matter. All services are evidently enough due solely to la- 
bour. In the cooperation of capital in production, labour is 
more remotely concerned. But the question is not the same 
with regard to the soil, the mines, the climate, the air for 
breathing, and the water for drinking. It is true that no mat- 



UTILITY AND WEALTH 



25 



ter how fertile the land is, it is valueless until man goes to it. 
The mine may be never so rich — it gives out no wealth of itself 
— man must dig. Even if diamonds lie upon the surface of 
the ground, man must go to them and pick them up. If the 
fruit has ripened uncared for and unknoAvn on the tree, man 
must gather it. But it is also true that the reward of labour in 
most of these cases is vastly disproportionate to the labour ap- 
plied. It is true that the diamond would be worthless without 
man; but it is man's existence and not man's labour that is 
essential. Man is a necessary term in the wealth-relation, the 
other term of which is an exterior fact. But this is widely 
different from declaring that man or labour creates all wealth. 
He picks up the diamond because it is valuable. It is not 
valuable because he picks it up. 

The following diagram will serve to indicate the point to 
which our analysis has proceeded : 



Goods 



internal 



external 



valueless 



valuable 



wealth 



individual 

national 

social 



Questions 
Is a field wealth ? 
Is a plough ? 
Is a waterfall ? 
Is a river ? 
Is the wind ? 
Is a railroad ? 
Is the sea ? 
Is society ? 
Is security ? 
Is the system of laws ? 
Within which subdivision should each of these be placed ? 



26 OUTLINES OF ECONOMIC THEORY 



NOTES 

Included in riches are, therefore, the territory occupied by nations, 
a road, a harbour, a canal, a church, a government building or a court- 
house ; a triumphal arch, fortresses, cannons, arms of all sorts, munitions 
of war, as truly as are those objects which make up individual or family 
fortunes. . . . When land is appropriated, air, water, and light likewise 
constitute riches. The sovereign has the undoubted ability to permit or 
refuse entry to the national domain, exactly as the owner of an estate 
may permit or refuse enjoyment of the water, or air, or light upon his 
property. This right of enjoyment, therefore, is not open to all. 

— Couecelle-Seneuil, Traite d'Ec. Pol. T. 1, p. 36. 

Immoral books, poisonous beverages, and adulterated articles of food 
are wealth of an actual but irrational sort ; so also are all things that 
minister to vice. These are real commodities, because somewhere in 
society are men whose impulses crave them. They are irrational, because 
the reason that is inherent in society as a whole, does not want them, 
and would cast them out if it could. 

— J. B. Clark (America), Phil, of Wealth, p. 205. 

Personal attainments, as subjective and immaterial, are excluded from 
the meaning of the term [wealth] : they are not a possession ; that im- 
plies externality to the possessor. They are what he is, not what he has. 
Popular thought and speech broadly distinguish the able man from the 
wealthy man. A man has a potential fortune, not an actual one, in his 
abilities. The term indicates a state of being able, and implies a possi- 
bility, not an attained result. Labour creates wealth, and acquired abili- 
ties are potential labour. They are to be regarded as the potentiality of 
the human factor of production, and it inti'oduces an element of con- 
fusion into the science to class them with the completed j)roduct. If 
these considerations were not sufficient to settle the economic status of 
a man's subjective qualities, it would at least sufBce for that end to apply 
to them the test of the traditional definition itself, in which exchangeable 
value is made to be the essential attribute of wealth. . . . Nothing can 
be subjected to this process which is an inseparable part of one man's 
being. — Clark, Phil, of Wealth, p. 5. 

Man is the author and the end — the subject of riches. We cannot 
confuse him with them without mixing in a kind of economic chaos cause 
and effect, subject and object — without involving the entire science in an 
impenetrable obscurity. 

— Coukcelle-Seneuil, Traite d'Ec. Pol. T. 1, p. 37. 



UTILITY AND WEALTH 27 

Doctor Koscher has called attention to the intrinsic absurdity of call- 
ing a violin manufacturer a productive labourer and the artist who plays 
the violin an unproductive one, as is expressly done by Mr. Mill and his 
followers. [Wie auffalled aber, dass die Arbeit des Violiufabrikanten 
productiv heissen soil, die des Violin Spielers unproductiv, obschon das 
Product des ersten gar keinen Zweck hat, als den vom letzten gespielt 
zu werden. List adds in exclamation. Who raises pigs is said to labour 
productively ; who develops men unproductively ! ] The violin would 
thus be classed as wealth ; the music, the sole end of its manufacture, not 
wealth. The product, music, satisfies a direct want, — the violin only an 
indirect want. The latter is an instrument for producing that which 
satisfies direct desire. The direct want-satisfying product is, if any- 
thing, more obviously wealth than the indirect one. Relative durability 
and tangibility are non-essential attributes. The mechanic who makes 
the violin, imparts utility to wood ; the artist who plays it, imparts utility 
to air vibrations. One product is perceived by the senses of sight and 
touch, the other by the sense of hearing. — Clark, Phil, of Wealthy p. 16. 

The articulate sounds of the speaker are the ferry boat ; the ideas are 
the cargo, and the latter may exceed the former in value to an indefinite 
extent. In this case boat and cargo are a simultaneous product ; the 
boat is fitted in form to every different lading, and the two, as an indus- 
trial product, are inseparable. This illustration affords the most search- 
ing test of our definition of wealth. The thought, as existing in the 
mind of the speaker previous to its utterance in words, does not fall 
within the conception. It is subjective to the man, and like his mental 
faculty itself is inalienable. It only acquires the attribute of transfer- 
ability when it attaches itself to the agent, — the vocal sound. 

— Claek, Fhil. of Wealth, p. 18. 

There would seem to be a certain absurdity in saying that people are 
poorer because they cure their diseases by medical advice instead of 
drugs, improve their minds by hearing lectures instead of reading books, 
guard their property by policemen instead of man-traps and spring- 
guns, or amuse themselves by hearing songs instead of looking at pict- 
ures. . . . Thus the mending of shoes is commonlj^ treated as a service, 
because we pay for it separately ; but we consider that a cook at a restau- 
rant ' ' produces ' ' a dish because our payment for his operations is lumped 
together with our payment for the material on which they were exercised. 

— Hexry Sidgwick (England), 
Principles of Political Economy, p. 78. 

Though we do not call permanent skill and culture any more than 
transient services by the name of wealth, still they resemble wealth in 



28 OUTLINES OF ECONOMIC THEORY 

the two important characteristics of being the results of labour and 
sources of satisfaction. The economist, no less than the statesman or 
philanthropist, must keep them in view in contemplating the growth of 
the resources of refinement and elevation of life, which the progress 
of civilization tends to furnish in continually increasing abundance. 

— SiDGwicK, Principles, p. 89. 



CHAPTER III 
THE ECONOMIC FORMULA 

Suppose yourself to have a pear and a peach — and some one tries to 
I ike them from you. You can protect but one, — the peach, — letting the 
other go. What has the peach cost you ? 

If one offers you a ride or an evening at the theatre, and you choose 
tlie ride, what have you paid for it ? 

If your work will produce for you two bushels of corn or one bushel 
of wheat, and you raise corn, what opportunity has been sacrificed ? 

If the work is the equivalent of its product, how much wheat has the 
corn cost you ? 

Why do men work ? 

When they stop, does this indicate that they want no more product ? 

If you were picking berries to eat, when and why would you stop 
picking ? 

Children enjoy playing, yet do not play indefinitely. Why ? 

If you were given $100 to spend, would you probably buy one thing or 
several ? 

Would your purchase of a second or third variety of goods show that 
you did not care at all for more of the first. Why not limit your pur- 
chases to one thing ? 

Do industrious men always work till the time comes to sleep ? Why 
do they ever take amusement ? 

Every misery that we miss is a new blessing ; therefore let us be thank- 
ful. — Complete Angler. Criticise this doctrine. 

24. Our subject of investigation has been stated to be man 
in some of his aspects as a member of society. Each human 
being, however, leads some sort of economic life of his ow^i. 
The study of society involves the study of man as a unit. The 
social forces are merely the summation of individual forces ; 
social movements are aggregates of individual movements. For 
the purpose, then, of understanding social phenomena, it is 
necessary to seek the ultimate principle of individual action. 

29 



30 OUTLINES OF ECONOMIC THEORY 

25. The fundamental assumption of Political Economy has 
been too often asserted to be that of the general prevalence 
Is human selfish- among human beings of the motive of self-in- 
ness the basis of terest. Possibly enough, selfishness is the most 
the science? general characteristic of the race, and possibly 

enough, there is no other so regular and reliable in its mani- 
festations, and therefore so readily lending itself to the pur- 
poses of scientific prevision and orderly treatment. And 
yet when we think of the great and growing role of phi- 
lanthropy in the world, we suspect of unstable foundations 
that science which takes no further account of man than of 
this one trait of selfishness. Obviously, that man who shall 
in his good time codify philanthropy into the laws and general- 
izations of science, will adopt a different human fact as his 
basis of procedure. 

There is a paradox here somewhere. Yet if Political Econ- 
omy can do no better, it must get on as well as possible 
with what it has. If its assuinptions are open to suspicion, 
its conclusions may well in some cases be found inaccurate or 
at best approximately true. But at all events the economist did 
not make man, and there is no occasion for calling the science 
ill names if it proceeds upon a somewhat dismal but general 
fact in human nature. Still, in a science intended to serve 
the purposes of every-day life, one wishes it were possible to 
proceed from man as he is, rather than from some abstract 
phase of him. 

We are about to analyze the production, distribution, and 
consumption of wealth, and to face the truth that men pro- 
duce in order that they may consume, and that demand is the 
motive force behind production. It is then in no small degree 
disconcerting, in view of the selfishness formula, to discover 
that if relatives, wives, and children are taken into account, 
two-thirds of all market commodities reach their consumers 
through gift, and that the motive of giving therefore furnishes 
two-thirds of the conscious purposes of economic effort. 

It seems then that the formula of selfishness does not sufS.- 
ciently exhaust the facts, and that some larger view of human 



THE ECONOMIC FORMULA 



nature must be found. We are in substance seeking a formula 
for human choices — a principle which shall be a working 
fact for economic reasonings, and which shall at the same time 
be true to human nature and applicable to the entire range of 
human activities. 

26. The economic formula generally accepted is that pro- 
posed by Courcelle-Seneuil — the satisfaction of our wants 
with the least possible sum of labour. Jevons 

approves of this formula, but amplifies it : " To of maximum 

satisfy our wants to the utmost with the least satisfactions the 

„„ , p , ultimate fact ? 

effort — to procure the greatest amount of what 

is desirable at the expense of the least that is undesirable 
— in other words to maximize pleasure, is the problem of 
economics." 

But while it is true that men occasionally work for the 
pleasure of working, they more commonly work to avoid the 
pain to themselves or to others of unsatisfied wants. Not 
the pleasure of eating or the pride of adornment, but the dread 
of hunger, exposure, or criticism is the main incentive to 
labour. To most men the question is one of comparison be- 
tween the irksomeness of effort and the irksomeness of unsat- 
isfied desires ; and to all men the question comes to this case 
if labour be sufficiently prolonged. The desires of man out- 
run his performance. He ceases to labour, not because he 
covets no more of labour's rewards, but because the pain of 
continuance is greater than that of unsatisfied desire. Desires 
become less intense with partial satisfaction, and labour, even 
if pleasurable in the beginning, passes the line of pain if long 
continued. 

27. For most purposes, then, it would seem preferable to 
state the problem of economics as the minimizing of pain rather 
than the maximizing of pleasure. Still, some _. .^^ ^ ^ 
provision must be made for the case of the man sacrifice the 
who works for the pleasure of working, and stops ^"i"^^*^ ^^'^t- 
with the cessation of pleasure, or of the man who chooses as 
between two lines of agreeable work that kind of work which is 
for him the more agreeable. The economic formula must be wide 



32 OUTLINES OF ECONOMIC THEORY 

enough to cover these cases. There are possibly as many men 
who prefer work without reward, as there are men who prefer 
idleness to any of the rewards of work. Nor is this pleasurable 
labour to be classed, for theoretical purposes, with play. Though 
the activity be enjoyable, yet if its aim is the creation of utility, 
and performance takes place not simply for the pleasure of 
performance, but in some measure with a view to the resulting 
product, ifr^must be classed as work. 

But there is a formula which is wide enough to cover all 
of these cases, and which is yet serviceable. Economic ac- 
tivity, whether of the pleasurable or the painful sort, may be 
stated in terms of sacrifice. For the man who works because 
he finds work pleasant, it would be a sacrifice to refrain from 
work ; he chooses that line of work which he prefers in view 
both of the pleasures of activity and the accompanying com- 
pensations in productiveness. He ceases to work at the point 
where continuance would be a sacrifice. The man to whom all 
effort is irksome chooses that line of activity which, in view 
both of the quality of the work and of its compensations, 
involves the smallest sacrifice. For him who prefers idleness 
to activity, activity would mean the larger sacrifice. 

The economic problem can accordingly be stated as the min- 
imizing of sacrifice. This formula includes in logical generali- 
zation, not only all of the phenomena commonly regarded as 
belonging to economic science, but also many classes of phe- 
nomena not ordinarily so regarded. The underlying law of 
economics is found to be identical with the primary law of 
physics, psychology, and sociology ; namely, that force follows 
the line of least resistance. 

28. This, then, is the ultimate principle which we are seek- 
ing as a generalization of human choices as affected by the 
forces of the industrial and commercial world. We find it to 
be a formula equally well adapted to the non-economic facts of 
life, and to be in substance a particular application of a law 
general in the physical and the moral world. Men follow their 
preferences. But preference is an outcome of a complex of 
internal and external factors. Man is himself a part of the 



THE ECONOMIC FORMULA 33 

problem. There are outer inducements, temptations, penalties ; 
there are inner appetites, antagonisms of conscience and sym- 
pathy, — hopes, loves, hates, and fears, — all phases of moral, 
mental, and physical weakness and strength. Out of the com- 
bination of these complex and varying factors results a line of 
new direction — one of least resistance when all the varying 
factors are allowed for — humanly speaking, a choice. 

We are fortunately free from the necessity of investigating 
the origin of choices or any of the psychological difficulties 
surrounding the question. It is sufficient for us that these 
choices take place as human nature presents itself. Men fol- 
low the line of least motive resistance. 

Suggestive Questions 

Suppose we say that men seek the maximum of satisfactions at the 
minimum of effort. Explain under this formula why the labourer works 
only eight hours a day ; or ten. 

Under the minimum-of-pain formula explain why the farmer stops 
working ; 

Why another man tramps ; 

Why another man begs ; 

Why another man hoards as a miser. 

Why does one rich man work, and another take his ease ? 

Can you explain these cases in terms of the minimum of pain ?• Why 
not? 

Explain in terms of sacrifice. 

Do you see any analogy in the fact that in pressing the spring you find 
a point of equivalent resistance ? 

Are there any subjects which you have studied which are worth know- 
ing, but which you do not think were worth your learning ? How can 
this be ? 

Why not produce silk in the United States ? 



NOTES 

Our instinctive indisposition to labour exists not to prevent our working, 
but to guide us in order that in each of our industrial actions we may 
attempt to attain the object of our desires with the expenditure of the 
least possible sum of labour. Thus, these two primitive impulses which 



34 OUTLINES OF ECONOMIC THEORY 

seem at first thought to be in opposition, one of which, desire, pushes us 
directly to labour, while the other, the love of repose, moves us toward 
idleness, work together in the same direction and move toward one end 

— that of satisfying our needs with the least possible sum of labour, or in 
other terms, toward increasing continually the effectiveness of our labour. 
This law of progress, long since observed and formulated by the physicists, 
is the axiomatic basis of all industrial science as well. 

— Coukcelle-Seneuil, Traite d'^Ec. Pol., T. 1, p. 34. 

When labour produces more commodity, there is more reward, and 
therefore more inducement to labour. If a workman can earn ninepence 
an hour instead of sixpence, may he not be induced to extend his hours 
of labour by this increased result ? This would doubtless be the case were 
it not that the very fact of getting half as much more than he did before, 
lowers the utility to him of further additions. By the produce of the same 
number of hours he can satisfy his desires more completely ; and if the 
irksomeness of labour has reached at all a high point, he may gain more 
pleasure by relaxing that labour than by consuming more products. 

— Stanley Jevons (England), Theory of Political Economy, 3d ed. p. 179, 

A is interested to rob B ; B, the weaker, has likewise his interest in 
allowing himself to be robbed in order that he may avoid something worse. 
But the state ? — J. C. Sismondi (France), 1772-1843. 



CHAPTER IV 

VALUE 

Would any system of political economy be possible for a man alone on 
a desert island ? 

Is there any sense in which Crusoe could be said to buy one thing with 
another or to exchange things ? 

Mention Crusoe's probable wants. 

Which would be the most pressing ? 

What would he set himself to obtain first ? secondly ? thirdly ? 

What would determine him to change from first to second ? 

Why would Crusoe work ? 

Why do men in society work ? 

Do we live to eat or eat to live ? 

Do we live to work or work to live ? 

Why does water sell for less than wine ? Iron than gold ? Wool than 
silk? 

Does the clerk in the candy shop eat much candy ? Why ? 

Why bring wood or hay to town ? Is this bringing an act of produc- 
tion ? Wliat does it produce ? 

Is the increase in value intrinsic ? 

29. It is a commonplace fact that if you are going to sell 
things at a very high price, you will not sell many of them. 
While apples are at ten cents each, most people 
purchase in limited quantities. If I am exceed- ^^^^^^ ^^ ^ 
ingly hungry for apples I may buy one at this 
price. As the price falls, my desires express themselves in 
larger numerical volumes. While my wants have not in truth 
enlarged, there have new conditions arisen in which apple 
appetites of lower intensity make themselves manifest in 
actual purchases, as one may imagine to himself the gradual 
subsidence of a lake or sea, and the appearance one after 
another of reefs, bars, and islands. 

35 



36 OUTLINES OF ECONOMIC THEOEY 

30. It has already been remarked that useful things may 
exist in such abundance as to bear no value. Water, for ex- 
ample, may be worth nothing — not that any particular amount 
of water has become less capable of satisfying human needs, 
but because the supply of water is greater than the total need. 
Some part of the total stock is thus absolutely without utility. 
This is simply another manner of stating the fact that human 
desires or needs are not infinite in any particular direction. It 
is also true that needs and desires become less intense with 
partial satisfaction. One will not ordinarily give as much for 
a second glass of water as for the first. The utility of each 
successive addition to the supply is commonly unequal per 
unit to the utility of the separate units of the previously 
smaller supply. 

This same principle is daily illustrated in our current expen- 
ditures. One does not apply his entire income to the purchase 
of food or shelter. Food is the primary necessity, but clothing 
is more acutely required than is a second dinner. We supply 
our wants in the order of their intensities. When one has pur- 
chased himself a reasonably large wardrobe, the fact that he 
makes no further purchases in this line does not prove that he 
has no further desire for clothing, but that he has a stronger 
desire for something else. He follows the line of least sacri- 
fice. So the purchase of apples at ten cents each would mean 
to you or me the lack of other things which we desire more 
intensely. 

So again, if one is picking and eating wild berries, it is cer- 
tain that somewhere he must tire. The first berries are well 
worth climbing ledges for. Finally there comes a berry 
equally as large and juicy, which is just worth the bother of 
picking. The next berry does not get picked at all. Remem- 
ber for future purposes that the last berry picked and the first 
berry not picked are called- marginal berries. They lie on 
either side the line of choice. The direction of least resist- 
ance changes at this point from picking to not picking. 

31. In a certain fashion all the phenomena of exchanges are 
comprised in the above examples. A castaway upon a desert • 



VALUE 37 

island has no one to trade with, and yet can essentially trade 
one thing for another, and manifests in his own life a complete 
cycle of economic activities. So far as Crusoe's work was 
rationally planned, he was constantly turning his efforts to 
that undone thing the doing of which was of leading impor- 
tance. At a certain point fishing was abandoned for game. 
More fish were refused in the interests of more game. The 
game cost fish, or the fish bought game, since the work which 
was potentially fish or game was applied to game and with- 
drawn from fish. 

32. Marshall excellently illustrates the principle as follows : 

"The primitive housewife, finding that she has a limited number of 
hanks of yarn from the year's shearing, considers all the domestic wants 
for clothing, and tries to distribute the yarn between them in such a way 
as to contribute as much as possible to the family well-being. She will 
think she has failed if, when it is done, she has reason to regret that she 
did not apply more to making, say, socks, and less to vests. That will 
mean that she has miscalculated the points at which to suspend the mak- 
ing of socks and vests respectively ; that she has gone too far in the case 
of vests and not far enough in that of socks, and that therefore, at the 
points at which she actually did stop, the utility of yarn turned into socks 
was greater than that of yarn turned into vests. But if, on the other 
hand, she hit on the right points to stop at, then she made just so many 
socks and vests that she got an equal amount of good of the last bundle 
of yarn that she applied to socks and the last she applied to vests." 

Emphasis has been placed upon what we may term individ- 
ual or non-social economics, because from no other point of 
view can the laws of markets and prices be subjected to ulti- 
mate analysis. The unit of market action is r .■ ■, , 

•' ^ Individual econ- 

individual action. Market outcomes are result- omy underlies 
ants from varied and conflicting individual s°"^'- 
movements. Social political economy rests upon individual 
economy. 

33. If one were asked to compare in point of utility a river 
of pure water with a pound of gold, he would 

find little hesitation in rating the river above ^f^vaiue°°*^°'^ 

the gold. The economist would unquestionably 

pronounce the river to constitute the greater social wealth. 



38 OUTLINES OF ECONOMIC THEORY 

He would not decide the matter in the same way if the ques- 
tion were one of vahie. Most of the utility of rivers can 
be enjoyed by any one without price. The sum of these 
utilities for future distribution rests substantially undimin- 
ished with use. Obviously no one will pay, however great 
may be the benefits enjoyed, for that which is exhaustless in 
quantity and freely at the disposal of all who come. Again, 
whatever may be the relative utilities of water and wine, 
there is little doubt which of the two will bear the higher 
price. It is in this that the notion of value differs radi- 
cally from that of utility. If men have enough of a thing to 
supply their needs and to spare, in so far they are fortu- 
nate, but the thing will have no value. No one will give any- 
thing for it because no one has to give anything for it in order 
to get it. It satisfies a need or desire — therefore has utility ; 
but it commands no sacrifice. The notion of value contains, in 
addition to the meaning implied by the term utility, the idea 
of sacrifice. Value is not the nieasure of utility. Value is the 
measure of the sacrifice involved in obtaining utility. Market 
value is the measure of the sacrifice involved through exchange 
in obtaining utility. 

34. Too great insistence cannot be placed upon this distinc- 
tion. The useful things external to man are objects of desire 
— they furnish service, afford satisfaction, or protect from dis- 

A + ^ „. comfort : if sacrifice is a condition to their enioy- 
As art economics ' . j j 

mostly interested ment, they command sacrifice. The quality of 
with utilities. iitility and not the attribute of value is the 
measure of desirability. In view of this fact, the field of 
economic investigation needs to be re-surveyed. Economics, 
... as a science, is mostly concerned with questions 

between utility of value. As an art, however, economics is the 
and value. application of economic principles to the well- 

being of society. Our concern is, therefore, not merely with 
wealth in the form of material valuable things, nor simply 
with any aggregate of values material or immaterial, but with 
goods. It is true that the difiicult questions of political 
economy mostly range themselves about the concept of value. 



VALUE 39 

We shall come, indeed, to appreciate that, as a science, political 
economy is little more than the development of the definition 
of value into its corollaries and applications. In questions of 
distribution value-doctrines are all important. But this is 
only another statement of the fact that value emerges in hu- 
man life only where obstacles and difficulties are found in the 
path of enjoyment, where satisfactions are saddled with deduc- 
tions, where needs impel to burdensome effort. We are richer 
in our rain-falls than in our irrigation ditches. Value is an 
expression of the niggardliness of nature — of resistance to be 
overcome — of the disparity between man's desires and his 
opportunities — of the necessity which rests upon him for 
sacrifice. Economic progress expresses itself in successive 
reductions of the sacrifices necessary to the satisfaction of 
desire, in the approach of commodities to the margin where 
value disappears, — in short, in the cheapening of things. 
Human interests are not in parallel with value, but in antago- 
nism. Commerce constantly affords verification of this truth. 
The destruction of the ship-load of spices has become a classi- 
cal example. The progress of monopolies is a series of illus- 
trations. A short cropj3ommonly sells for a greater aggregate 
price than an abundant crop. Human weal, social welfare, 
is out of harmony with the current concept of wealth. That 
water should become so scarce as to command a high market 
price, would mean that society had not grown richer, but poorer. 
Value measures sacrifice, and not well-being. 



THE DETERMINATION OF VALUE 

If transportation is productive, wliat do you say of storekeeping ? of 
trading generally ? 

Why should any one want to trade ? 

35. The notion of market value is not, however, complete, until 
the nature of the sacrifice and the manner of its determination 
are examined. It is clear that the sacrifice will fix itself between 



40 OUTLINES OF ECONOMIC THEOEY 

two limits, — at its lowest, at the utility of the commodity in 
question, to the owner, for his own purposes, if exchange does 
not take place ; at its highest, at the intensity of 
sacrmce °^ ^^® desire or need of the purchaser. This will be 

made clear by an illustration in the concrete. A 
Avants a hat, B has a hat for trade. B will insist on something 
in exchange — something of utility to him in use or sale — and 
something that he cannot get for nothing. A must make a 
sacrifice in some form or other, or more accurately A must turn 
over to B something which would require of B sacrifice to get 
it. It may be that B will consent to receive services ; but on 
whatever terms the exchange takes place, each must render 
to the other some good in exchange for some good. Nor 
will either consent to the exchange unless the utility turned 
over to him is greater than that of the thing in hand, and 
would involve a sacrifice in obtaining it from some other 
source. The fact to be emphasized for present purposes is 
that A could not get a hat on other terms than of dispossess- 
ing himself of other useful things or of rendering utilities of 
service. 

36. Note, however, in passing, that the payment rendered 
by A is no measure of the utility to A of the thing pur- 
chased. Probably he would have paid more had 
urJorutmTyr' ^ higher price been imposed. He finds his 
personal schedule of values to differ from the 
market schedule greatly to his own advantage. 

These utility-producing effects of exchange are sometimes 
overlooked or misconceived. It is evident that the transporta- 
tion of a commodity from one place to another 
pro^^^cttvf ? ^^^ ^^^ vastly to its usefulness — as, for exam- 

ple, wood from the forest, coal from the mine, 
water from the spring. It is equally true, also, that the legal 
transfer of the commodity adds to its usefulness in a similar 
manner. To recur to the cigar illustration : through the method 
of exchange, the man who has the cigars and does not care for 
cigars, is able to make the cigars useful to himself in pro- 
portion as they are useful to some other man ; but until ex- 



VALUE 41 

change becomes a factor in the case, the cigars remaining witli 
him who cannot utilize them, and the taste for cigars continu- 
ing with him who cannot satisfy it, the cigars form no part of 
the effective utilities at the disposal of men. This illustration 
of the benefit of exchange is still incomplete until the com- 
modity transferred by the second man to the first is consid- 
ered, where again by a change in ownership a utility is created 
or increased. 

37. We are now prepared for a full definition of the term 

value. It is the measure of the sacrifice — generally in utility, 

possibly in effort, involved through exchange in 

^. . . .,. ' ^^ .. - *= , Value defined. 

obtaining utility. We may put it m other words 

as follows : The value of a thing is its power in exchange by 

■ virtue of its utility of commanding sacrifice. 

Stated shortly, then, value does not measure utility, but the 

sacrifice made for utility. Utility corresponds to motive, 

value to resistance. 

38. This is complete enough in the way of definition, but it 
remains to inquire how the sacrifice gets measured. What in 
actual affairs determines how great a sacrifice A must make to 
obtain the hat ? It is evident that it cannot be 

greater — in fact, it must be less — than A's j^°^^q° 
measure of the utility to him of that which he 
parts with. B will not part with the hat unless the measure 
of his sacrifice falls below the utility to him of that which he 
gets. If the two men are monopoly possessors of their respect- 
ive commodities, the adjustment of terms must depend on many 
factors, such as skill, courage, independence, endurance, and 
the intensity of the respective needs or desires involved. But 
as a rule, exchanges are of commodities which are not monop- 
oly commodities — where the terms of the transaction between 
A and B are approximately fixed by what some one other than 
B will do with A, if B will not agree, and what B can find 
some one other than A to do, if A will not agree. 

What another man will do, that is, will consent to do, de- 
pends upon the adjustment which takes place between his 
individual desire and the total of other desires as bearing on 



42 



OUTLINES OF ECONOMIC THEORY 



the commodity in question. Eor the purposes of simplicity 
assume a single and perfectly organized market, in which only 
two kinds of commodities are being exchanged, — as for in- 
stance, hats and silver bullion, — and that there are ten offer- 
ers of hats, each with one hat for sale, no substantial difference 
in quality existing, and that each possessor is willing to receive 
silver in exchange. There are also ten holders of silver of a 
disposition to exchange for hats. Let it be assumed that — 

A is willing to exchange a hat for 20 oz. of silver. 



B 


18 






c 


16 






D 


14 






E 


12 






F 


10 






G 


8 






H 


6 






I 


4 






J 


2 






Z is willing to exchange for 1 hat 16 oz. 


of silver 


Y 


15 




X 


14 




W " ' 


13 




V 


12 




u 


10 




T 


7 




S 


6 




R 


3 




Q 


1 




1 



Evidently Q cannot make an exchange, since no one will 
part with hats for the amount of silver which Q is willing to 
give. Hats cannot exchange for silver at lower than two 
ounces of silver. On the other hand, A and B cannot find 
buyers, because no one is willing to sacrifice over sixteen ounces 
of silver to get a hat. But hats cannot go at sixteen ounces, 
because only one man will give that amount of silver for a hat, 
and there are seven other holders of hats willing if necessary 
to sell at less than sixteen ounces. But the hats will go higher 
than four ounces of silver, since there are two hat-owners who 



VALUE 43 

will exchange at tliis rate, and eight silver-owners who are 
willing to pay more than this if necessary. With hats at six 
there are three hat-men willing to trade and still eight silver- 
owners willing to trade. With hats at ten there are five hat- 
owners and six silver-owners disposed to trade. The price will 
then be at over ten ounces of silver for each hat, but it will 
not be as high as twelve ounces of silver, since at twelve there 
are six hat-owners and only five silver-owners willing to trade. 
The trades must then take place at somewhere from a little 
above ten to a little below twelve. It is conceivable enough 
that, in the higgling of the market, the sales should take place 
at very little over ten, though concerted and skilful action on 
the part of hat-owners might push prices up to nearly twelve. 

It is unnecessary to remark that in actual affairs this mar- 
gin for fluctuation and higgling is much narrower, unless 
when monopoly holders confront each other, or when buyer 
and seller arrange terms of exchange for articles, at least one 
of which is by reason of some peculiarity of fancy in one of 
the traders, or of quality in the article, incapable of accurate 
comparison with others of its class. 

39. Evidently also in the above analysis, Z, who would, if 
necessary, have given sixteen ounces of silver to get a hat, but 
who on the market found it necessary to give Exchange is 
but ten or twelve, has greatly profited by the productive, 
institution of exchange. So of J., who would, if Q^^si-rents. 
necessary, have exchanged a hat for two ounces of silver, but 
found the opportunity for exchanging for ten. This increase 
of social wealth, through the method of exchange, — that is 
to say, this addition to the total usefulness of commodities 
through the adjustment of consumption at the point of great- 
est comparative utility, — is beyond measurement. So in the 
cheapening of commodities by more effective methods of pro- 
duction, the gain to consumers represented by the difference 
between what they do sacrifice, and what they would if neces- 
sary sacrifice, while vast, is incapable of measurement, not 
only in totals, but commonly by each individual in his own 
case. 



44 OUTLINES OF ECONOMIC THEORY 

40. It is sufficiently obvious that for most of the buyers 
and sellers on the market, a change in market price would not 
result in their retirement from the market. By most of the 
buyers a higher price would be paid Avere the purchase condi- 
tioned upon a higher payment. So with most of the sellers, 
a lower price would be accepted were the sale possible only 
upon this condition. 

In the adjustment of prices, however, in the great markets, 
there are producers and sellers who are on the point of ceas- 
ing to produce or of offering to sell, if price goes in any degree 
lower. There are purchasers, also, whose demand is of such 
a character that they will be excluded from the market if 
prices go in any degree higher. For all buyers and sellers 
other than these whom Ave term marginal, there is a surplus, 
a differential advantage measured from the point of actual 
market sacrifice. These differential quantities are denominated 
quasi-rents. 

41. The law of margins is thus the key to an understanding 
of market adjustments, and value appears as the market out- 
value measures (^ome of differing individual estimates of utility, 
merely marginal For purchasers other than the marginal purchaser 
relative utility. yr,]^^g furnishes 110 measure of utility. It is at 
most the measure of the marginal utility — marginal utility 
being defined as the utility to that purchaser who is willing 
to sacrifice least for a given commodity, or an additional sup- 
ply of it, and who at this sacrifice obtains it. Nor even for 
the marginal purchaser is market value a measure of absolute 
utility, but only of relative utilit}''. The poor man foregoes 
what the rich man purchases, not because the absolute utility 
to the poor man is less than to the rich man, but because the 
relative utility is less. A pound of meat may be many times 
more useful to the poor than to the rich man. But to the 
poor man, to have the meat means to lack for bread, while the 
choice for the rich man lies between bread and a cigar or 
some unthought minor comfort on a prospective European 
trip. So again, one may forego the bread to-day which he 
would have purchased a week or a year ago, though no less 



VALUE 45 

liuRgry to-day. The strength, of the desire for other things 
is a necessary element in the decision. The marginal case is, 
then, a case of marginal relative utility ; that is, of marginal 
sacrifice. A given case is marginal, simply because the utility 
gained and the utility sacrificed are approximately equal. 

42. We say approximately equal. The equality cannot be 
absolute, since enough of inequality must remain to tip the 
scales of choice. There seems to be danger here of getting 
into infinitesimal quantities. But in every marginal adjust- 
ment there must be a marginal trade, a marginal buyer and 
a marginal seller, a marginal pair of sacrifices. Not that 
these two people exchange with each other — this is evidently 
improbable. Yet the market price which suits all exchanging 
parties must be one which suits these two. The hat-seller 
who is nearest the point of retirement — he who estimates 
hats most highly relatively to silver — must get silver enough 
to induce him to trade. Among the silver-sellers there is one 
also nearest to the verge of retirement. The market ratio of 
exchange is the point of adjustment between the two mar- 
ginal dispositions — a rate which preserves a sufficient trace of 
quasi-rent to induce both doubters to trade. 

Note, also, that there is as well a marginal excluded pair, — 
two men, each disposed to act as market factors, if prices 
swerve in their respective directions ; but with the price as it 
is, each sniffs doubtfully at the bait and retires. These men 
lead the forces of demand and supply which are in reserve in 
the event that prices are modified. 

43. That sales generally take place in terms of money 
against services or commodities, introduces no modification in 
theory. The utility to each man of his money is the utility 
of its most desirable application — of that thing into which 
he will turn his money by exchange. He who exchanges 
money for hats does so because this is for him its application 
of highest utility. The marginal purchaser is that purchaser 
to whom the other things which he might procure with his 
money most nearly approach the importance of a hat. The 
marginal seller is the seller for whom to part with his hat 



46 



OUTLINES OF ECONOMIC THEORY 



most nearly approaches in importance that which the money 
obtained for the hat will buy. 

44. In our analysis of demand and supply, in the succeed- 
ing chapter, we shall see that in the long run sellers' sacrifices 
are the market statement or market equivalent of producers' 
sacrifices. The marginal producer's sacrifice is to be stated 
as the sacrifice of that producer to whom other employments 
offer relatively the greatest attraction, that is to say, approach 
most nearly to an equality of advantages with the chosen line 
of production. 

The following diagram will perhaps aid in clarifying the 
student's notions of the adjustment of demand and supply at 
market price ; the relations between actual demand and sup- 



.£s^ 




ply and potential demand and supply, the quantities de- 
scribed as costs or sacrifices of production, and producers' and 
consumers' (sellers' and buyers') rents. 

Let XT represent the different degrees of intensity of de- 
mand, 25, 24, etc. 

Let AB represent the scale of producers' sacrifices rising 
from 4, 5, etc., to 11, 12, etc. 

Let 10 represent the point of market equation between 
demand and supply — that is to say, the price. 

Those who will not sell as low as 10, and those who will not 
pay as high as 10, are retired, — are merely potential elements 
in the market. 



VALUE 47 



Questions 

Find the market price in the following problems : Boys desire base- 
balls according to the following schedule : 100, 95, di, 87, 82, 78, 60, 55, 
53, 49, 47, 45, 39, 36, 31, 26. With only six base-balls in the market, 
what will be the price ? With 9 ? 12 ? 15 ? 

Let the above schedule represent the falling intensity of one boy's dis- 
position to buy base-balls : will this affect the results ? 

Sellers' minimum prices are as follows: 36, 35, 33, 31, 30J, 29J, 28; 
buyers' maximum payments as follows : 40, 38, 36, 34, 33, 32. 

Sellers', 19, 18, 17, 14, 12, 7, 6, 5, 4, 3 ; buyers', 1, 2, 3, 4, 5, 6, 7, 8, 9. 

NOTES 

But had not also Crusoe an economic system ? Are, in truth, the 
products which the peasant consumes in his household, the labour which 
he directs to his own consumption, less clearly economic facts than his 
marketed products or than the labour of his hired men ? Schaeffle rightly 
observes that ordinary breathing is not an economic function merely be- 
cause it is an unconscious natural necessity. 

— WiLHELM RoscHER (Germany), translated from System der Volks- 
wirthschaft, Einleitung, c. 1, sec. 2, n. 6. 

Thus, in a besieged city the total utility of food supplies has not risen, 
but solely the exchange value. According to Cordier, the wheat harvest in 
France amounted. 

In 1817 to 48,000,000 hectolitres with a market value of 2046 mill, francs 
" 1818 " 53,000,000 " " " 1442 " " 

" 1819 " 64,000,000 " " " 1170 " " 

— Memoire sur I'agricuUure de la Flandre Franqaise. 

If the climate of England could suddenly be changed to that of Bogota, 
and the warmth which we extract imperfectly and expensively from fuel 
were supplied by the sun, fuel would cease to be useful except as one of 
the productive instruments employed by art ; we should want no more 
grates or chimney-pieces in our sitting-rooms ; what had previously been 
a considerable amount of property, in the fixtures of houses, in stock in 
trade and materials, would become valueless ; coals would sink in price ; 
the most expensive mines would be abandoned ; those which were retained 
would command smaller rents. — N. W. Senior (England). 

Surely, a fertile soil, a mild climate, a fine network of navigable rivers 
and safe and deep roadsteads, are the earnest of wealth for a country, 
and yet they have no exchange value. It is even possible to establish an 



43 OUTLINES OF ECONOMIC THEORY 

antithesis between these two terms ; wealth corresponding to the idea of 
abundance, value answering to the idea of scarcity. Let us suppose, for 
example, that by a lucky miracle worked by human industry, all products 
were to be so multiplied as to become as abundant as spring water or the 
sand of the shore ; should we not have to regard this marvellous multipli- 
cation as an increase of wealth, nay, as the climax of wealth ? Yet, 
according to the above hypothesis all things precisely on account of their 
superabundance would have lost all value ; they would have neither more 
nor less value than that very spring water or those grains of sand which 
we just compared with them. 

— Chakles GiDE (France) , Principles of Political Economy (D. C. 

Heath, 1892), p. 41. 

If the objects the most essential to the maintenance of life were the 
most costly, then would humanity have much difficulty in living and 
much claim to pity. But in truth it is the things which from the physi- 
ological point of view are superfluities, that are the most costly ; and in 
this fact the mass of humanity find small cause for complaint. 

— Translated from Paul Leroy Beattlieu, Precis d'' Economic Poli- 

tique, 2d ed., p. 202. 

At first sight it may appear strange that so few persons, and those so 
little conspicuous, should decide the fate of the whole market ; but, on 
closer examination, this will be found quite natural ; if all are to exchange 
at one market price, the price must be such as to suit all exchanging 
parties ; and since, naturally, the price which suits the least capable con- 
tracting party suits in a higher degree all the more capable, it follows 
quite naturally that the relations of the last pair whom the price must 
suit, or as the case may be, the first pair whom it cannot suit, afford the 
standard for the height of price. 

— Boehm-Bawerk (Austria), Positive Theory of Capital, 1st ed. 
(Macmillan), p. 213. 

So far as is consistent with the inequality of wealth in every commu- 
nity, all commodities are distributed by exchange so as to produce the 
maximum of benefit. Every person whose wish for a certain thing ex- 
ceeds his wish for other things, acquires what he wants provided he can 
make a sufficient sacrifice in other respects. No one is ever required to 
give what he more desires for what he less desires, so that perfect freedom 
of exchange must be to the advantage of all. 

— Stanley Jevons, Theory of Pol. Ec, p. 141. 

There has been a long controversy as to whether " cost of production " 
or "utility " governs value. It might as reasonably be disputed whether 
it is the upper or the lower blade of a pair of scissors that cuts the piece 
of paper. — Alfred Marshall (England), Economics of Industry , p. 221. 



VALUE 49 

Leon Say {De la Bichesse Individuelle et de la Bichesse Publiqne, p. 29) 
measures the worth, of goods after the grade of discomfort involved in 
their loss. This is in substance the notion of "effective utility," devel- 
oped at length by J. B. Clark in his Philosophy of Wealth, Chap. V. 

Dresses that are no longer worn, books that are no longer read, pictures 
that have ceased to be looked at, remedies that no longer cure, — how 
long the list would be of those riches which have lost their value ; and 
yet, if by chance the desire of the collector, perhaps the most intense of 
all desires, happens to settle on these dead riches, they will receive a new 
lease of life, and will immediately obtain perhaps a far higher value than 
they had in the course of their previous existence. But value varies not 
only at different times, but also from country to country, and even from 
individual to individual. We all know the proverb, de gustihus non dis- 
putandwni ; let us add " and values " ; for they, too, depend on each man's 
tastes. — Charles Gide (France), Political Economy, p. 45. 



CHAPTER V 

COST OF PRODUCTION 

45. It has been stated that the value of a thing is fixed by 
the sacrifice — generally in utilities — which it commands in 
exchange in obtaining it. Cost of production should be stated 
in analogous terms. As to any particular article, cost of pro- 
duction is the sacrifice of other possible values produceahle by the 
application of the same productive energies. 

■ 46. That values exist otherwise than as the result of labour, 

has already been remarked. There is evidently little relation 

between the value of a nugget of gold, stumbled 

Value exists xxpon in a careless walk, and the effort devoted 
apart from labour, ^ ' 

thereto. The value of the nugget rests prima- 
rily upon the fact that gold is the object of intensely strong 
desires ; secondarily, upon the fact that gold is to be had only 
in small qaantities, and commonly upon terms of great effort. 
Supply being limited relatively to the demand, only those de- 
sires attended with high possibilities of sacrifice obtain satis- 
faction. Were it true, however, that a pound of gold was 
ordinarily to be had at the effort commonly applied to raising 
a bushel of potatoes, pound nuggets and bushels of potatoes 
would come to exchange at an approximate equality. Until 
this equality was reached, effort would be directed to obtain- 
but tends roughly ^^§ °^® ^^ ^^® commodities to the entire or par- 
te correspond tial exclusion of the other. It is clearly not 
*°^*' true that the value of each particular com- 

modity corresponds to the quantity of labour which resulted 
in its forthcoming. Market value is the equilibrium point at 
which demand and supply are in equation. Values, then, tend 
to stand at a point compensating the production of the more 
expensive, rather than of the less expensive portions of the 

50 



COST OF PRODUCTION 51 

market supply ; since if price falls, the marginal producer will 
cease production. If nuggets were obtainable on easy terms 
of effort, their market value would of necessity fall, until by 
reason of the fall the special advantages of nugget gathering 
were cancelled. 

47. It is then not unreasonable to infer, that in general the 
value of any commodity, while not dependent upon the cost 
of production, does depend upon the cost of re- ©oes labour meas- 
production, which cost of reproduction is meas- ure product or pro- 
ured by the labour immediately or remotely duct value labor ? 
expended therefor. The reasonings of the previous pages, 
however, make for another view, namely, that instead of the 
labour expended being the measure of the value of the com- 
modity, the value of the commodity is the measure of the 
labour rationally to be expended in its production. For most 
purposes these two views are not antagonistic in results ; but 
they are so in theory. As long as two things are and must 
be approximately commensurate, it does not greatly matter 
which is made the measure of the other. Values of commodi- 
ties commonly correspond approximately to the labour quan- 
tities in production ; and it is equally true that the labour 
expended upon different commodities, commonly corresponds 
approximately to the value of the commodities when pro- 
dviced. This labour measure of value is safe enough, and 
absolutely correct, when there is a clear choosing between 
the indisposition to labour and the gratification of some par- 
ticular desire. If a man desired only one sort of satisfactions, 
only one sacrifice would be required of him, — the sacrifice 
attendant upon effort. But when exertion is certain in one 
direction or another, and when therefore non-exertion is not 
the alternative in the choice, and when therefore the sacrifice 
involved in obtaining one thing is the deprivation of another 
thing obtainable by the same labour, the measure of the value 
of the first is in the sacrifice of the unobtained thing, and not 
in the sacrifice of mere effort. 

48. If, for example, you have the opportunity of going to 
the theatre, or to a picnic, or for a walk, and prefer theatre 



52 OUTLINES. OF ECONOMIC THEORY 

to picnic, and picnic to walk, your attachment to the theatre 
is better measured by your picnicking than by your walking 
disposition, — by the most you will sacrifice rather than by 
the least. 

If for a bicycle you would give your bull pup or your Irish 
setter, or even your pony, your pony best indicates the degree 
in which you desire a bicycle. 

If with your next week's wages you determine to buy either 
a new coat or a tennis set, and finally decide in favour of the 
tennis set, not your week's work, but the coat, measures what 
your tennis set has cost you. 

It has been said that greater love hath no man than that 
he should lay down his life for his friend. If so, not the 
lesser services of kindness, but the very love of life, measures 
a man's highest devotion to his fellow. 

If you would pay a dollar for a hat, you would with still 
greater readiness pay any smaller sum ; thus a dollar, and not 
fifty cents, is the sacrifice yard-stick of hat values to you. 

49. But the real difiiculty with the labour measure of value 
lies still deeper. Man produces that he may consume ; labour 

is a process of value creation. Man labours 
In what sense ^ because this is the condition on which his enjoy- 
ment of certain goods depends. Labour, how- 
ever, is not the cause of the utility ; the utility is the cause 
of the labour. So utility is the cause of value, — the scarcity 
which entails effort being a mere condition. Product is the 
reward of effort. Labour has value merely in the sense that 
the value of the product may be conceived as reflected back 
upon the means by which it is obtained. It is, then, not logi- 
cal to measure the value of the product by the value of the 
instrument of production. The labour measure of value, there- 
fore, means nothing unless understood as suggesting the dif- 
ferent productive possibilities in the application of labour. 
In the last analysis it is not the labour itself, but its product, 
■which satisfies desire and therefore commands sacrifice. 

50. The importance of this very obvious distinction will 
repeatedly become manifest in our succeeding discussions. It 



COST OF PRODUCTION 53 

is worth while, however, to point out in this place that wages 
are really never paid for labour. Nobody wants labour as 
such. It is commonly disagreeable to perform, or even to watch. 
Mere motion, simple activity, is as valueless as it is void of 
beauty. Only for product, and in proportion to product, can 
labour command a price. Ultimately, the emjjloyer purchases 
not labour, but the goods which labour affords. 

If it should strike the student that all this is a saying of 
undisputed things in unnecessarily solemn fashion, it will 
suffice to remind him that the prejudice against prison labour 
originates mostly in f orgetfulness that wages flow from product, 
and that increase in social product means increased average 
wages, or to call to his mind that whatever may be the merits 
in the tariff controversy, the question is generally argued as 
one of wages. It is asked how we are to compete with ill- 
paid labour. The discussion starts from the notion of wages 
as a cause instead of as an effect, and gets nowhere in conse- 
quence. Wages are a fact to be explained, instead of to explain 
with. Should this last fall short of clearness, it will receive 
further elaboration in the course of various discussions to 
follow. 

51. The measure of value is then not in the labour devoted 
to the production of any good, or in the utility of that good, 
but in the sacrifice, commonly of other goods, involved in 
obtaining the good in question. The quality and quantity of 
labour applied are irrelevant, except in so far as the applica- 
tion of labour is a sacrifice of other possible goods. 

52. The usual statement of cost of production, and of its 
relation to market prices, proceeds from the point of view 
of the individual, and is obscured for theoretical ^suai statement 
purposes by problems of wages, rent, and inter- of cost of produc- 
est. It conforms, however, clearly enough, to ^°^' 

the facts of individual experience. The producer pays his dif- 
ferent expenses of production, and if the market returns are 
inadequate, withdraws from production at least in a measure. 
If the returns are gratifying, production is increased. In- 
creased production tends to follow rise in price, and decreased 



54 OUTLINES OF ECONOMIC THEOBY 

production to follow fall in price. On the other hand, lower 
prices tend to follow increase of production, and higher prices 
decreased production, other things all the while being assumed 
equal. Differences between market price and cost of produc- 
tion constantly tend to be obliterated by resulting changes in 
the total supply. The market price will average high enough 
to induce an ordinarily sufficient supply for the market, and 
this average price will be approximately the cost of produc- 
tion of the necessarily most expensive portion of the market 
supply. 

53. But while this analysis of market movements is faith- 
ful to the facts, it is not ultimate in theory ; it is still to be 
asked why the producer ceases production when price falls. 
Erom his point of view, it is sufficient to say 
that further production is a matter of no profit 
or of absolute loss ; but the ultimate answer is that productive 
energies can be employed in other directions to results com- 
manding larger rewards from society. If these productive 
energies, applied in other directions, will produce larger mar- 
ket values, production ceases not because cost of production is 
too high absolutely, but too high relatively. Continued appli- 
cation of productive forces in the same direction would be a 
sacrifice of greater market values possible in other directions. 
The term " cost of production " does not express the final 
analysis of the facts ; it only half suggests, or altogether fails 
to suggest, the decisive influence behind — namely, the de- 
mand. The difficulty is not that cost of production is too 
high, but that other things produceable at the same effort are 
more desired by society. 

Clearly the price in any given market at any given time is 
determined without reference to cost of production, otherwise 
than as bearing on the prospect of future supply. In fact, 
nothing is claimed for cost of production further than that it 
indicates a normal or ideal price around which market price 
fluctuates, and from which in either direction it cannot long or 
widely depart. This normal price is, however, to be reached 
or approximated only through future expansions or contrac- 



COST OF PRODUCTION 55 

tions in supply. Professor Senior remarks that " any other 
cause limiting supply is just as efficient a cause of value in an 
article as the necessity of labour in its production." President 
Walker adds " that if supply is limited it does not matter 
whether there is any cost of production or not." And even if 
supply is not limited, and the term " cost of production " be 
understood to cover cost of reproduction, the irrelevancy holds, 
speculation aside, until reproduction takes place and affects 
the supply. If the cost of reproduction necessitates prices 
beyond the desires of consumers, it is again irrelevant. And 
we may safely go farther. If desirable at all, any commodity 
will be produced unless demand is stronger for some other. 
What the thing costs to produce it is irrelevant, except so far 
as its production displaces other products. Production does 
not adjust itself to cost of production, but to intensity and 
quantity of demand. To say that something is not produced 
because the cost of production is too high, is really to say 
that productive energies are more fertile of satisfactions when 
applied elsewhere. The so-called necessity for a protective 
tariff, for example, is stated to be a high cost of production 
in particular industries. A more accurate statement would be 
that at equal expenditure of productive energies other indus- 
tries afford a greater amount of satisfactions. This is tlie 
important fact in international trade. An industry never 
ceases to exist because, rightly speaking, it is unable to com- 
pete with foreign industries, but because it is unable to compete 
for its labour supply with home industries. Simple depopula- 
tion is the only manner in which an industry can fail through 
foreign competition alone. 

This manner of statement assimilates all questions of price 
to the general law of demand and supply, and does away with 
unnecessary distinctions of principle between the phenomena 
of competitive and those of monopoly prices, and between the 
phenomena of prices over long intervals of time and those of 
prices as fixed in any given market at any given time. It is 
true that in the long run, different forces modify in some 
degree the conditions of supply, but this is not an ultimate 



OUTLINES OF ECONOMIC THEORY 



differeuce in theory. Prices do no doubt approximate to tlie 
cost of production as the term is generally used, but cost of 
production is a secondary or resulting fact, or rather, an aggre- 
gate of facts, being in itself an expression of demand working 
upon a large number of commodities simultaneously. 

Cost of production must, then, as a formula for value, be 
interpreted to mean sacrifice of production, and to indicate 
merely that each industry must be equally remunerative with 
every other for the kind and quantity of labour applied, — or 
more accurately, that the normal price in each industry must 
remunerate each producer at least as well as would be pos- 
sible for him in any other industry. 

54. Even under the interpretation of sacrifice, the cost-of- 
production formula is open to the objection that it states as 
the ultimate cause of value that which in its nature is purely 
Sacrifice of pro- Subordinate and secondary. Utility is the pri- 
duction formula mary causc of value ; sacrifice, merely a con- 
no u ima e. dition. Needs and desires, not sacrifices and 
costs, are the ultimate facts. Utility furnishes the motive for 
sacrifice, while value is the measure of the sacrifice. Demand 
controls supply, and supply adjusts itself to 
uitonate force demand as expressed in market values. Pro- 
ducers in any line will continue to produce, so 
long as the remunerations obtained in the chosen line of activity 
exceed the resulting sacrifice of the remunerations possible in 
other lines. Differing degrees of advantage in different indus- 
tries for different producers induce a constant change in the 
applications of productive energies. 

But a change in activity is not the cause of existing values, 
though it may affect them. Men adapt their productive activ- 
ities to price conditions as the market has determined them ; 
not with any hope of fixing prices (except in cases of monop- 
oly), and never with any idea of determining price by cost of 
production. The problem is always to adjust cost of produc- 
tion to price, — never price to cost of production. Changes 
in value modify supply, and changes in supply resulting from 
changes in value, in turn modify value; but demand is the 



COST OF PRODUCTION 57 

motive force behind supply, and expresses itself as motive 
force in terms of value. In practical affairs producers as an 
aggregate and producers individually comport themselves in 
full harmony with this theoretical fact, and in complete recog- 
nition of it. To explain production in terms of the cost-of- 
production doctrine violates the facts or means nothing. To 
explain values under that formula, is to emphasize the secondary 
factor in the question to the exclusion of the primary factor. 
Value is a resultant from the forces of demand and supply, 
supply being itself a resultant from demand. Sacrifices of 
production are important only as modifying the supply term. 
Prices rise whenever demand tends to raise them, unless coun- 
teracting tendencies in the volume of supply are thereby 
set up. 

55. The physical sciences excellently illustrate social forces 
in this respect. Water flowing from one receptacle to another 
sets its own limit to the process. Freezing brings an end to 
the solidifying process through a self-manufactured protection 
against the frost. A coal fire finally smothers itself with 
ashes. A spring, hard pushed, increases its resistance to a 
new point of equilibrium. Chemical reactions themselves 
bring about new equations. The larger part of social phe- 
nomena are of this self-limiting type, where forces set in action 
counteracting tendencies. Wars bring the peace of exhaustion. 
Satisfaction lowers desire to satiation. Continued labour makes 
ever shriller the cry for rest. The core of economic theory is 
the doctrine of margins, indicating a shifting point of adjust- 
ment between opposing forces initiated from one primary fact 

of demand. 

Suggestive Questions 

What was the value to Crusoe of a day's labour ? 

Would the value have been something else had his island been another 
island ? 

Do you think the value of a man's working powers depends upon what 
it has cost to rear him ? Why ? 

Is there any sense in which you may say that apples in your cellar 
draw interest ? Ice in the icehouse ? Bread in a lunch basket ? Money 
in your pocket ? 



58 OUTLINES OF ECONOMIC THEORY 

Does money sometimes increase in utility to you without increase in 
amount ? 

Wliy do you not study Hebrew ? Do you think it altogetlier useless ? 

What do you expect to do for a living ? Why not something else ? 

What is the reason that all farmers in your neighbourhood do not raise 
cabbages exclusively ? 



NOTES 

There is no connection between cost of production and price in the 
cases of food in a beleaguered city, of quinine, the supply of which has 
run short in a fever-stricken island, of a picture of Eaphael, of a book 
that nobody cares to read, of an armour-clad ship of obsolete pattern, of 
fish when the market is glutted, of fish when the market is nearly empty, 
of a dress material that has gone out of fashion, or of a house in a deserted 
mining village. — Marshall, Ec. of Tnd., p. 2'i5 n. 

The fact is that labour once spent has no influence on the future value 
of any article ; it is lost and gone forever. In commerce by-gones are 
forever by-gones ; and we are always starting clear at each moment, 
judging the value of things with a view to future utility. 

— Jevons, Theory of Pol. Ec.., p. 164. 

Mill and some other economists have followed the practice of ordinary 
life in using the term " cost of production " in two senses ; sometimes to 
signify the difliculty of producing a thing, and sometimes to express the 
outlay of money that has to be incurred in order to induce people to 
overcome this difficulty and produce it. But by passing from one use of 
the term to the other without giving explicit warning, they have led 
to many misunderstandings and much barren controversy. 

— Marshall, Ec. oflnd., p. 214 n. 

That Tokay is not valuable because there are Tokay vineyards, but 
that the Tokay vineyards are valuable because Tokay has a high value, 
no one will be inclined to deny, any more than that the value of a quick- 
silver mine depends on the value of quicksilver, the wheat field on the 
value of wheat, the brick kiln on that of brick, and not the other way 
about. It is only this many-sided character of most goods — their capac- 
ity of being employed in many different uses — that gives the appearance 
of the contrary, and a little consideration shows this to be an appearance, 
and nothing more. As the moon reflects the sun's rays on to the earth, 
so the many-sided costs reflect the value which they receive from their 



COST OF PRODUCTION 59 

marginal product on to their other products. The principle of value is 
never in them, but outside them in the marginal utility of the products. 
— Boehm-Bawerk, Pos. The. of Cap., p. 189. 

I hold labour to be essentially variable, so that its value must be deter- 
mined by the value of the produce, not the value of the produce by that 
of labour. — Jevons, Theory of Pol. Ec, p. 165. 

I must absolutely deny that wages can in any sense be taken to repre- 
sent the labour element in cost of production. Wages, as Mr. Mill ob- 
served in the passage already quoted, may be regarded as cost to the 
capitalist who advances them ; though perhaps it would be more correct 
to say that, so far as they go, they measure his cost, which really consists 
in the deprivation of immediate enjoyment implied in the fact of the 
advance. But to the labourer wages are reward, not cost ; nor can it be 
said that they stand in any constant relation to that which really consti- 
tutes cost to him. If they did, wages in all occupations, in all countries, 
and in all times, would be in proportion to the severity of the toil which 
they recompensed. . . . The point for which I am contending will possi- 
bly appear to some persons to involve a purely theoretical issue. A theo- 
retical issue no doubt is at stake, but I believe a better example could not 
easily be found of the intimate connection between theory and practice, 
and of the way in which an unsound theory can invert for people the true 
relation of phenomena and mislead in the practical business of life, than 
is furnished by this doctrine. The tiTith of this statement will only fully 
appear in later chapters of this work ; but even here I may give an 
example or two. What, for instance, is now the grand argument with 
the people of the United States for the maintenance of protection ? Why, 
the high cost of production in that country. And what is the evidence 
of the high cost of production ? Simply the high rates of wages which 
prevail. How, they ask, can we with our high-priced labour compete 
with the pauper labour of Europe ? I must frankly own that accepting 
the point of view of the current theory of cost, I can find no satisfactory 
reply to this question, and I am quite sure that Mr. Wells, who implicitly 
adopts this point of view, has wholly failed to furnish one. 

— John Cairnes (England), Leading Principles of Pol. Ec, p. 53. 

That which is called cost of production of an object or a service is the 
price at which this object or service can be obtained in a permanent way 
in approximately the quantity which is commonly demanded. ... In 
truth, things take place in the following order : (1) the market value 
determined by causes we have studied fixes the remuneration of the work 
which has served in production; (2) this remuneration, according as it is 



60 OUTLINES OF ECONOMIC THEORY 

sufficient or more or less than sufficient, brings about continuation, or 
increase or decrease, in future supplies ; (3) this production results in an 
equal increased or decreased offer of product in a fashion to render the 
offer of each commodity of no great variability, and to force ceaselessly 
toward a level the remuneration of different services. 

— Coukcelle-Sexeuil, Traite tVEc. Pol., T. 1, p. 283. 

Between contemporaries the value of different commodities is measured 
simply by gold or silver, and when it is said, for example, that a particu- 
lar product is commonly worth a kilogramme of gold, this indicates simply 
that it is necessary to put forth, in order to obtain the product, a sum of 
productive energy equal to that which the acquisition of a kilogramme of 
gold requires. — Courcelle-Seneuil, Traite (VEc. Pol, T. 1, p. 322. 

According to the reports of English manufacturers, an English work- 
man produces on the average almost twice as much as a Frenchman ; the 
latter in turn more than an Irishman. An English wage-earner who had 
worked in a French factory spoke before the Parliamentary Committee 
his opinion of the French as follows : "It cannot be called work they do ; 
it is only looking at it and wishing it done." Thus, for example, a good 
English spinner with an eight-hundred spindle machine could produce 
daily sixty-six pounds of yarn ; a Frenchman only forty-eight pounds. 
. . . The report of an Agricultural Interest Commission places the North 
American workman above the English in good conduct, fidelity, and 
interest. A Berlin wood-cutter accomplishes as much in ten days as an 
East Prussian in twenty-seven days (Hoffman). English planters on the 
Hellespont prefer to pay Greek labourers ten pounds sterling yearly, 
besides their keep, rather than Turkish, three pounds. So, the Malay 
field labourer gets two and one-half dollars per month, the Malabar four, 
the Chinese six. 
— Wilhelm Eoschek, System der Volksicirthschaft, Book 1, c. 1, sec. iO n. 

Physicists and chemists have recognized two classes of changes : first, 
those which tend to go on indefinitely until all the matter present has 
suffered the alteration in question ; second, those which give rise to 
products which are unfavourable to the original force at work ; — such 
changes are self-limited, and may cease therefore long before all the 
material has been used. ... In reality the self-limiting are vastly the 
more numerous. 

— JoHx W. Laxgley in Pop. Science Monthly, Feb., 1895. 

The term cost of production is used in at least four different meanings 
in economic discussion. 

1. It may mean the fatigue or irksomeness of labour. Those engaged 
in extractive industries are most conscious of its meaning. Thus a 



COST OF PRODUCTION 61 

farmer, doing much of his work with his own hands, instead of paying 
for it with wages, will often count the cost of this or that farm operation, 
or this or that crop, in terms of his own weariness. Prof. J. E. Cairnes, 
in his "Leading Principles of Political Economy Newly Expounded " 
(New York: Harper & Brothers), stated that in economic theory cost 
of production must always mean the fatigue of muscle and brain. Wages, 
interest, etc., he said, are not the cost of production. Labour and enter- 
prise drift to those places and into those occupations in which they get 
the greatest rewards in proportion to cost; i.e. the greatest wages and 
profits in proportion to exertion of body and mind. 

2. Cost may mean the destruction of one objective or material utility 
in the production of other utilities. Agriculture uses up seed, gxain, 
manures, and implements, destroying the utilities embodied in them, to 
produce further harvests ; manufactures and transportation destroy coal 
10 produce steam power. We have to use " cost " in this sense whenever 
we inquire whether a nation is increasing its material means of satisfac- 
tion by the means in which it consumes its resources. 

3. Cost may mean the sacrifice of an alternative utility, opportunity, 
or value. The blacksmith might be able to make $1.50 a day as an 
agricultural laborer, when any other man in the neighbourhood could 
make but $1.25 ; but, being able as a smith to make $2 a day, he stays at 
the forge. He will estimate the cost of production of his work at the value 
of his best alternative employment — the $1.50 a day. It is in this sense 
we constantly use the word " cost" in discussion of international trade. 
Thus a nation that could produce iron at $11 a ton may import it at $13, 
simply because the labour and capital that would produce a ton of iron at 
$11 may be productive of enough wheat or cotton to buy a ton and a half 
or two tons at $13. 

4. Finally, cost may mean the sum of all the prices paid for the 
materials and labour and sacrifices involved in production. This is what 
the business man ordinarily means by cost. 

Cost in this latter sense is not always a cause of value or price ; that is, 
the price of a product is not necessarily determined by its cost of produc- 
tion in terms of the prices of labour and materials. On the contrary the 
price of the final product may determine how much the producer will 
offer for materials and labour. It is impossible here to trace out all the 
relations of cause and effect, but one general principle will hold good. 
More than one final product is commonly made from the same raw mate- 
rial, and the prices of those products, even after allowing for all the 
other differences in expenses, may be unequal. Nevertheless, the various 
producei's will buy their raw material at subsequently the same price, 
and that price cannot exceed the market value of the least valuable prod- 
uct made from the material. It is, therefore, the least valuable product 



62 OUTLINES OF ECONOMIC THEORY 

that determines the cost of production for all other products made from 
the same raw material, or by substantially the same kind of labour. 
This cost of production, acting on the supply of the other products, tends 
to bring down their market prices to an equality with the least valuable 
product ; that is, it becomes, in their cases, a cause of value. 

— Prof. E. H. GiDDiNGs, 6th Ann. Bep. Com. of Labour, p. 9 n. 



COST OF PRODUCTION— Con«i/iMed 

What different motives might one have for laying aside money ? 

Do people commonly get interest on money deposited in national 
banks ? 

Did you ever pay for having your travelling-bag guarded ? 

Is it conceivable that money should draw negative interest ? money- 
lenders pay charges for keeping ? 

Would any saving still take place ? 

56. This difference in manner of statement becomes im- 
portant as we attempt an analysis of the factors which 
make np cost of production. Approaching the wages ques- 
tion from the point of view of comparative demand, it is 
Wages from easy to understand why the labourer is employed 
point of view of in one industry rather than in another, or why 

a ourer. wages differ in different industries or for differ- 

ent men. That the labourer is employed in one industry 
rather than in another, simply means that the adjustment of 
demand has resulted in a rate of wages sufficient, in compari- 
son with the wages of other industries, to attract and hold the 
services of this particular labourer. The labourer will remain 
in this industry until the same labour applied elsewhere will 
obtain for him, directly or through exchange, a greater sum of 
satisfactions, — more accurately, will involve for him a smaller 
sum of sacrifices. 

57. Considering the question from the point of view of the 
employer, the reasonings are parallel. So long as profits are 
adequate, employers in any particular industry will compete 
with each other and with employers in other industries for 
more labourers. Wages must stand in any industry at a rate 



COST OF PRODUCTION 63 

which, under conditions of competition with employers in 

other industries, will attract employes. The demand of the 

employer for labour is the mere working out of the demand 

of society for some particular commodity. As 

long as the social demand is sufficient to permit y[ew of°empioyer 

the payment to producers of as great means of 

satisfaction as they could obtain in some other industry, so 

long will employer and labourer consent to continue the 

relation. 

58. It remains to inquire whether any important principle 
or dangerous error is involved in the term " cost of produc- 
tion of labour." This term occupies something like the same 
relation to the wages question that "cost of is there a cost of 
production of commodities " occupies to the production for 
price question (price means value expressed in 
terms of money). The adjustment of demand and supply is 
the ultimate fact in either case. Cost of production in either 
case is irrelevant, excepting as bearing on the volume of the 
future supply. Any Malthusian or other population law is, as 
concerns wages, at most an indication of tendencies and a 
prophecy of ultimate results. (Read in the Encyclopoedia, 
article on Malthus.) But in a most important respect cost of 
production of labour offers no parallel to the cost of production 
of commodities. As to commodities, cost of production is a 
summary of the working out in industry of the social de- 
mand for some commodities as compared with others. De- 
mand must be understood in the sense of the human desire for 
goods. No parallel demand exists for an increase of popu- 
lation, nor is there any commodity satisfying a desire, with 
which labour may be compared in the working out of com- 
parative demand, other than the desire for rest, — the in- 
disposition to labour. Por the purpose, then, of general 
reasonings, there is no force in the phrase " demand for 
labour " otherwise than as an expression of the 
different lines of activity in which different JemaTdforiaUur 
human desires are seeking their satisfactions. 
Inertia, friction, displacements, and confusion aside, the total 



64 OUTLINES OF ECONOMIC THEORY 

demand for labour is as constant and immeasureable as are 
human desires. It thus seems best, as regards the total of in- 
dustries, to avoid any consideration of the demand and supply 
of labour, and to regard wage payments as, for immediate pur- 
poses, merely a question of subdivision among the labourers of 
that part of the total product to be ascribed to labour. For 
industries or individuals the wages question is one of distribu- 
tion of the industrial product. The portion of the product 
falling to the share of any labourer or group of labourers is 
approximately the measure that his or their production minis- 
ters to the social demand. 

59. So far as relates to the determination of rates of inter- 
est, the current cost-of -production formula is more than superfi- 
cial — it is misleading. Accurately employed, the 
The cost-of-pro- ° "^ ^ "^ . 

duction doctrine term can mean nothing more than compensation 

as related to f qj, abstinence, without which saving would not 
take place, and without which capital would not 
be created. But savings are not in general made with a view to 
interest, but with a view to future needs. The French people 
save more closely than the American, while rates of interest 
with them are lower than with us. Savings would take place 
in large amounts if no interest were paid, or even if charges 
for safe keeping were usual. Presumably less saving would 
take place if interest were lower. In some measure, probably 
in a large measure, a higher rate of interest results in a larger 
supply of loanable funds to borrowers. But some saving would 
take place if no interest were paid ; and this is a demonstration 
that the payment of interest is not a necessary condition to the 
existence of loanable funds. That the rate of interest ranges 
far above what is necessary as an incentive to save, and differs 
so widely in different countries, shows that it is the marginal 
advantage derived by borrowers from loans, and not the com- 
pensation of the abstinence involved in the saving, which fixes 
the rate of interest. 

The law of demand and supply is here in full force, and 
supply is only in small degree affected by so-called cost of pro- 
duction ; that is, the rate of interest is only in slight measure 



COST OF PRODUCTION 65 

made up of necessary compensation for abstinence. Interest is 
continually lowering, and yet both capital and loan funds are 
continually increasing. Saving does not stop because interest 
is lower to-day than five years ago, nor does the lower rate of 
interest of to-day mean that saving has become a ma,tter of 
greater ease or of lower abstinence. It means simply that for 
one reason or another, abstinence included, there are now more 
wealth for use and funds for loan to be had for interest. If 
all people were to-day as willing to save, even without recom- 
pense, as they are now willing to save with recompense, the 
interest rate would not in any degree alter. 

60. It is conceivable enough that the advantages derived 
from loan funds should so far fall as to furnish demand rather 
an insufficient inducement to producers to forego than supply must 
consumption, except to the degree that provi- explain interest, 
dent forethought for the future should be effective. In this 
event, the volume of loan funds would be approximately 
limited by the saving for prudential purposes, and interest 
would be limited by the marginal desire of borrowers. It 
is also conceivable enough — indeed the condition is prob- 
ably the existing one — that the advantages from the use of 
capital should be in many parts of the world more than suffi- 
cient to postpone the consumption of commodities, even without 
the provident motive of insurance against future needs. But 
in this case, also, interest would be fixed in the adjustment of 
demand and supply at the marginal desirability of loan funds. 

Suggestive Questions 

Does the marginal producer's or seller's sacrifice fix price ? or is it 
the marginal purchaser's sacrifice ? or is it the equation of demand and 
supply ? Which is the primary force ? 

Why does the nearest excluded buyer not buy ? Nearest excluded 
seller not sell ? 

AVhy do some producers stop producing when price falls ? 

What do they do then ? 

Why do others continue to produce ? 

Do producers expect to determine price by their sacrifices ? 

Would it be well for most of them if they could ? Or do they adapt 

F 



66 OUTLINES OF ECONOMIC THEORY 

production to price ? Do they lead or follow ? How do these answers 
apply to monopoly producers ? 

Are wages determined by demand and supply, or by productiveness of 
labour, or by both ? How may you reconcile affirmative answers ? 

Do you think that our higher standard of comfort makes our wages 
higher than European wages ? 

Is there any relation between high standard of living and high effi- 
ciency ? 

What does make our wages higher ? 

Has the fertility of our soil anything to do with it ? 

What limits the employer's disposition (ability) to pay wages ? 

Can the farmer increase the crop by being hungry ? If so in what sense ? 

Can he increase his ability to pay wages from the fact that his hired 
man has a large family ? 

Can the hired man use this fact to increase his wages ? 

Do wants = wages, or wages = wants ? Which is th& nearer the truth ? 

Are women's wages lower than men's because they can afford to work 
for less ? 

Why does not the employer have to pay them more ? Why may he 
not pay them still less ? 

Do employers make more by hiring women than men ? 

Where do manufacturers get their materials ? What do they cost the 
producer ? 

Is it possible to lose on the product of one's own labour ? How ? 

What do you mean by cost of that which you produce with your own 
labour ? 

What do you mean by cost to you of your own labour ? By cost to 
you of X's labour ? 

Whose sacrifice of production is commensurate with market price ? 

Criticise the term " Cost of production." 

Mention all the different reasons which might impel you to borrow, 
and to pay interest. 

Suppose you were working a farm, what would impel you to borrow ? 

Where and when would you stop borrowing ? 

Does borrowing ever take place for other than productive purposes ? 

Is it accurate to say that interest is paid solely because of the produc- 
tivity of capital ? 



NOTES 

Although, then, we have traced its instrumentality in production to 
nature and labour, is capital itself not productive at all ? Certainly it is, 



COST OF PRODUCTION 67 

in more than one sense of that too ambiguous word. It is first " produc- 
tive " because it finds its destination in tlie production of goods; it is 
furtlier productive because it is an effectual tool in completing the round- 
about and profitable method of production once they are entered on ; 
finally, it is productive indirectly because it makes the adoption of new 
and profitable methods possible. One thing, however, it is not ; it is not 
independently productive in the sense on which the most important part 
of the controversy turns. As the old economist Lotz expressed it briefly 
and succinctly: "Of any independent labour in capital there is simply 
no question." — Boehm-Bawerk, Pos. Theory of Cap., p. 99. 

If the insecurity of compensation is so great that people who have 
wealth will not lend it, the disposition to hoard will be intensified, and 
the reason is that the motive for saving is the provision against emergen- 
cies, and that this feeling is stronger and more enduring than for the sake 
of profit on loans. It is a mistake with many economists to say that 
saving is due to the desire of profit. If people could get no profit or but 
a small profit or interest, they would still save ; perhaps save all the more, 
for it is found necessary with prudent people to save for the sake of 
security ; and we may be sure that people saved and hoarded with the 
greatest energy before they could find the people whom they could trust 
as borrowers ; and similarly a very low rate of interest stimulates saving. 
— Thokoli) Rogers (England), The Economic Interpretation of 
Hist., Tp. 235. 

For, after all, family affection is the main motive of saving. That 
men labour and save chiefly for the sake of their families, and not for 
themselves, is shown by the fact that they seldom spend, after they have 
retired from work, more than the income that comes in from their sav- 
ings, preferring to leave their stored-up wealth intact for their families ; 
while in this country alone twenty millions a year are saved in the form 
of insurance policies, and are available only after the death of those who 
save them. — Marshall, Ec. of Ind., p. 153. 

This power of anticipation must have a large influence in economics ; 
for upon it is based all accumulation of stocks, of commodity, to be con- 
sumed at a future time. That class or race of men who have the most 
foresight will work most for the future. The untutored savage, like the 
child, is wholly occupied with the pleasures and the troubles of the 
moment ; the morrow is dimly felt ; the limit of his horizon is but a few 
days off ; the wants of a future year or of a lifetime are wholly unfore- 
seen. But in a state of civilization a vague though powerful feeling of 
the future is the main incentive to industry and saving. 

— Jevons, Theory of Pol. Ec, p. 35. 



CHAPTEE VI 

PROFITS DEFINED 

Would you call interest received on notes profit ? A dividend on bank- 
stock ? Rent of a house ? 
Salary received and spent ? 
Salary received and put by ? 
Wages received and spent ? 
Wages received and put by ? 

61. Leaving out of consideration the bounties of nature, all 
goods may be said to result from the application of human 
energies to the-human environment. Natural forces may or 
may not be concerned in the process. Any activity so modi- 
fying or distributing matter or force as to contribute imme- 
diately or remotely to the creation of utility, is productive 
activity; and if this activity be human and purposed to the 
creation of utility, it is labour. Natural forces are best con- 
ceived as taking in the process, the part of aids or multipliers 
of human energy. Natural forces are not, however, essential 
to the production either of utility or of profit. Wood may be 
whittled or stone be carved to an increased usefulness without 
the aid of any natural force. Goods in the form of services 
are commonly independent of natural forces. It is true, how- 
ever, that some of the goods necessary to the existence of 
man, namely, food products, are conditioned for their supply 
on the reproductive powers of nature. And while it is not 
true that wages or profits result in every case and necessarily 
from the aid of natural forces, it is true, as we shall see, that 
the rate and total of both are intimately associated with the 
employment of natural forces. 

62. In the ordinary business sense, if one plants a field he 
must get back more in return than he sowed, else there is no 

68 



PROFITS DEFINED 



profit. If one hires labourers, buys materials, pays interest 
and rent, and produces a machine which will not sell for 
enough to replace the expense, there is no profit. But if one 
apply himself, or the productive energies in his control, to 
results in products less in value than the value he might other- 
wise have produced, the case is not so clear. 

In fact, the word "profit" is used in ordinary affairs with per- 
plexing indefiniteness. One man means by profit that surplus 
which remains to him after charging against the gross gain 

interest and rent and a fair compensation for his 

-m 1 J. T Term is indefinite 

own services, lor example, a storekeeper own- -„„^-„, 

^ ^ '^ in ordinary use. 

ing his own store building worth $5000, and 
carrying a stock of goods worth $10,000, makes a gross gain 
per year on his sales of $4000. This $4000 is merely the 
difference between the cost price and the selling price of the 
goods he has sold. It is not unusual to find this entire $4000 
included in the term " profit." A second merchant would in- 
sist upon deducting interest on capital invested in land and 
stock, say $900, and would regard the residue of $3100 as 
profit. Another would deduct also the value of his own time 
and effort, say $1500, and would allow but $1600 to stand for 
profit. Yet another would look at his inventory of wealth at 
the end of the year as compared with the beginning, and 
would regard as profit whatever increase had been made, treat- 
ing his living expenses as part of his expenses of business, 
and regarding his land and stock in trade as cooperators with 
him in the general process of earning him a livelihood and 
gaining him a surplus. 

To the merchant, the question is mostly one of bookkeeping, 
the facts, and not the names for them, standing to him as im- 
portant matters. Eor us, however, it is necessary to fix upon 
some definite and specific meaning for the words which we 
must use. Some clearness of thinking also comes about with 
clearness of definition. Were one to ask a real estate specu- 
lator what profit he had made upon a lot costing him $1000, 
which he had held for one year and sold at $1500, he would 
answer either $500, or $500 minus interest, and if asked what 



70 OUTLINES OF ECONOMIC THEORY 

he had done with the profit, he Avould have no hesitation in 
replying that he had used it in liis Hying expenses. Nor 
would it ever occur to him in fixing his profit to deduct the 
wages of his own superintendence. His business is to make 
profits and to live off them. So with the trader in grain or 
live-stock. And in no one of all these cases would it ordi- 
narily occur to charge up anything for risk of loss. 

Crusoe, if asked, at the close of his harvest season, what the 
season's work had profited him, or what wages he had made, 
would probably interpret the question as an inquiry into the 
effectiveness of his season's labour, after deducting his outlays 
of seed and the wear and tear of his primitive appliances. If he 
could have done better on another piece of land, or with a dif- 
ferent crop, he would not find it unnatural to say that another 
course would have been more profitable. In this sense, evi- 
dently all labour is profitable as compared with idleness. 
Different lines of production are only relatively, never abso- 
lutely, unprofitable as long as anything remains above 'expen- 
diture. 

The sense in which the term is used in this Crusoe illustra- 
tion, extended and developed to apply to the complex relations 
of the business world, is the economic sense. Profit is one 
form of remuneration for labour — for human effort. 

63. The existing industrial system is a competitive system 
organized upon lines of division of labour and exchange. 
Profit may be Social life adds important factors to the Crusoe 
absolute or reia- problem. Division of labour becomes possible 
^^^' only on terms of possible exchange of products. 

We will suppose, for illustration, that a man needs or desires 
ten different sorts of commodities, which he may, if he will, 
produ.ce for himself. If he finds that by producing some few 
or one of these commodities in large quantities, and obtaining 
the others of the ten by exchanging for them some portion of 
his product, he can thereby obtain in the aggregate a greater 
sum of satisfactions than by the other method of direct pro- 
duction, he will make use of the opportunities afforded by ex- 
change. In this he simply follows the prospect of the greater 



PROFITS DEFINED 71 



profit, and if the outcome justifies his expectation, his labour 
is relatively profitable. Even if the outcome is disappointing, 
his labour may be absolutely profitable. 

The further development in the exchange system by which 
the producer employs not only his own activities, but the 
activities of others, — immediately in the form of services, or 
remotely in the form of commodities, — involves no essential 
modification in the nature of profit. 

64. Profit is merely one form of the remuneration of labour, 
and is essentially in strict parallel with wages. Had usage so 
decreed, the two terms might well have been 

merged in one. But as the terms are established , ^^ mguis ed 

'-' from wages. 

in use, profit points to remuneration without the 
intervention of an employer, — where the labourer is himself 
the projector (imprenditor, undertaker, unternehmer, entrepre- 
neur) of the enterprise. Wages indicate the intervention of 
an employer. Profit may be conceived as a form of wages 
from society as employer. Rightly considered, all individual 
workmen, other than wage-earners, are imprenditors. That 
enterprise promises to be relatively profitable which affords 
prospect of a better return to the imprenditor than with equal 
sacrifice he may reasonably expect in another line of activity. 
And if no line of activity promises profit as compared with 
wage-earning, or with production for direct personal consump- 
tion, the imprenditor can without sacrifice betake himself to 
one of these courses. 

It is important to note at this point that this phrase " rela- 
tively profitable " points to an element in wages and profits, 
which from another point of view we have considered under 
the aspect of producers' and sellers' rent. 

65. Inasmuch as, in the present form of social organization, 
that life which excludes exchange and any form of industrial 
interdependence with one's fellows, is practically out of the 
question, we may safely consider that some one of the different 
forms of wage-earning furnishes for each man that marginal 
type of activity by which for him the comparative profit of 
any other activity is to be estimated, and to which, meeting 



72 OUTLINES OF ECONOMIC THEOKY 

elsewhere with, unsatisfactory remuneration, he may betake 
himself without sacrifice. 

From this point of view the intimate association of wages, 
profits, and interest becomes manifest. If wages are anywhere 
Relation of profit found to be high, profits may also be expected to 
to wages, rent, be high, — in any event, as high as wages, — since 
in eres . otherwise employers and self-directed labourers 

would tend to become wage-earners. Also where labour is pro- 
ductive of large results in goods, capital, which is an indirect 
application of labour to like ends, may normally be expected 
to be highly productive of goods, and therefore to command a 
high rate of interest. 

66. It will be noticed that the element of compensation for 
risk, which enters largely into the business man's notion of 
profit, is rigorously to be excluded from the eco- 
nomic definition of the term. It is true that 
remuneration for risk and true profit are seldom capable of 
accurate discrimination in practical affairs, but in theory it is 
clear that so far as the return of any venture is compensation 
for risk, it is not compensation for labour of management, and 
that unless the return is more than compensation for risk there 
is no room for profit. And with equal care must be excluded 
from the notion of profit that portion of the return which is 
in fact interest upon capital. Interest bears the same relation 
to capital as does profit to labour. 

It will be helpful to summarize at this point the factors in 
production, and the names which are applied to their respec- 
tive forms of compensation, — remembering that capital stands 
for what man has done to adapt his environment to his pur- 
poses, the useful changes which he has impressed upon the 
outside world. 



Primary Factors < 



wages 
man remunerated in 

profits 

capital — in interest 
environment ] 

land — in rent 



PEOriTS DEFINED 73 



Suggestive Questions 

Does nature produce anything? Is Henry George correct in saying 
that it produces everything of profit ? 

Is man a producer ? 

What do you call his productive activity ? 

Is labour the only productive fact ? 

In what different forms is productive labour remunerated ? 

What aids does man have in production ? 

Does he consume immediately all that he produces ? Why not ? 

Is any part of this residue an aid in production ? 

What do you call that part ? What do you call its compensation ? 

Is a lawyer a producer ? A minister ? A cook ? A factoi'y hand ? 
The employer of the factory hand ? A school teacher? 

What do you call their respective remunerations ? 

A farmer has a farm worth $1000, machinery and stock worth $1000, 
hires a man at $300 per year, works himself, gets $1000 worth of crop. 
Apportion this into wages, interest, rent, and profits. 

A carpenter takes the contract for the carpenter work on a building at 
), works six months himself and pays his men $800. It costs him 
to live during the six months. He might have worked by the day, 
receiving $100 in wages. What is his profit ? 

Is it possible to have absolute profit and relative loss ? 



NOTES 

We come to the conclusion that the wages of the employer and of the 
workman are generically identical and only specifically different. The 
question between the two parties engaged in joint product is, what is 
the share which each party shall receive, the cost of materials being 
deducted in the residual distribution ? — Rogers, Ec. Int. of Hist., p. 21. 

Now it will be plain that, in the language of logicians, the two first 
elements of profit are objective, i.e. they are external to the agent, and 
determined by conditions which the agent cannot control. The third, his 
own labour, is subjective, and it is plain that on this his real profits 
depend. Our analysis, therefore, shows that the capitalist employer is a 
labourer, and that his remuneration depends entirely on the efficiency of 
his labour. Whether or no he gets too much in the distribution of the 
gross value is another question, but the more necessary workmen make 



74 OUTLINES OF ECONOMIC THEORY 

him by being as much as possible unlike him, the greater will be his 
share. — Rogers, Eg. Int. of Hist., p. 19. 

As Adam Smith says, ' ' The real wages of labour may be said to con- 
sist in the quantity of the necessaries and conveniences of life that are 
given for it; its nominal wages in the quantity of money. . . . The 
labourer is rich or poor, is well or ill rewarded, in proportion to the real, 
not to the nominal wages of his labour." But the words "that are given 
for it" must not be taken to apply only to the necessaries and conven- 
iences that are directly provided by the purchaser of the labour or its 
products ; for account must be taken also of the advantages which are 
attached to the occupation, and require no special outlay on his part. 

— Marshall, Ec. of Ind., p. 271. 



CHAPTEE VII 
RENT OF LAND 

If you were renting land for farming would you pay more for some 
land than for other ? Why ? 

How much do you think you could handle advantageously without 
hiring men ? 

Why not try to get along with half as much ? One-fourth as much ? 
Twice as much ? Four times ? 

If you had 320 acres, do you think two men in diversified farming 
could get twice as much from the land as one ? Four times as much as 
two ? Eight as four ? Sixteen as eight ? Where would this stop, if ever ? 

Would it matter for this purpose whether the crop were strawberries 
or wheat ? 

Would the advantages of increase in numbers ever stop with straw- 
berries ? 

Can two men harvest more hay or wheat than one ? Two times as 
much ? Three times as much ? 

Would you prefer good land at high rent or poor land at low rent ? 
Why? 

67. It is a matter of every-day observation, that from one 
piece of land one man makes large profits, that from another 
piece of equal quality a second man obtains a greatly less 
return, while a third man may fail to recover his actual out- 
lay. If these men are renters, the first makes large profits over 
and above his rent, while the third is getting mortgaged. 

The returns of agriculture result from the effectiveness of 
human energies cooperating in production with the energies of 
nature. Capital is to be conceived as an indirect 
application of human energies. This is not to ^g^cro'^?'^"''^^ 
deny that in some measure nature affords per- 
fected and valuable goods, commodities which are to be 
regarded as gratuitous to man, as an unearned value, rather 



76 OUTLINES OF ECONOMIC THEORY 

than as products of his labour. It is to be remembered, how- 
ever, tliat these vahies are fixed in the market by the marginal 
sacrifice process, — where labour of necessity has part, — and 
that the unearned value appears, therefore, as an accidental 
increase in wages or profits, or as attached to land under the 
form of rental or selling prices. ISTatural forces and advan- 
tages furnish instruments or opportunities for the exercise of 
human activities, and are best conceived in the aspect of aids 
and multipliers of human energies. The results are not to 
be ascribed to man alone, or to land and nature alone, but 
to human energies applied to the land. E-ent, therefore, is 
broadly to be defined as payment for the use of land. The 
amount of the payment will tend to be proportional to the 
value of the opportunity. 

68. The Kicardian theory of rent, from which, for the most 
part, we shall not widely diverge, is not difficult of statement. 

It rests fundamentally upon what is known as 
Ricardian theory ^^^^ ^^^^ ^^ diminishing returns. Were the ca- 
stated. '-' 

pacity of any one field unlimited, and were suc- 
cessive increases of product possible without at some point 
reaching a condition where increased outlays of productive 
energies were recompensed less bountifully in products than 

were previous outlays, rent, so far as it is a 
^n ^r 'turn™^'^^^^" question of agricultural products, would mostly 

disappear, being limited to the differential ad- 
vantages of some one field over any other offered field for the 
purposes of this entire production. Transportation charges 
are not alloAved for in this illustration. The tendency towards 
diminishing returns is not an economic theory, but is one of 
the most commonplace facts of agriculture. The very exist- 
ence of rental and sale values of land sufficiently attests it. 
" Were it not for this tendency, every farmer would save 
nearly the whole of his rent by giving up all but a small piece 
of his land, and bestowing all of his labour and capital ripon 
that." (Marshall.) 

The reader should note that land, in economic phrase, in- 
cludes rivers and seas and mineral deposits. It is not clear 



EENT OF LAND 77 



that the law of diminishing returns applies to all extractive 
industries equally. It is questionable whether it applies to 
the sea at all. The returns of mining are in a measure to be 
conceived as a consumption of the resources of the earth, 
rather than as a mere using. 

The origin of rent as a historical inquiry, the fluctuations 
which rents in the aggregate and rents in particular have 
exhibited and still exhibit, and the probable tendency of rents 
in the future, are questions which cannot be separated in 
treatment from this agricultural law of diminishing returns. 
" Whatever may be the future developments in the art of agri- 
culture, a continued increase in the application of capital and 
labour to land, must ultimately result in the diminution of the 
extra produce which can be obtained by a given extra amount 
of capital and labour." (Marshall.) 

With increasing population and expanding demand for 
agricultiiral products, it therefore comes about that cultiva- 
tion tends to extend itself to less and less desirable land. As 
soon as market prices make the cultivation of 24-bushel land 
practicable, the opportunity to cultivate 25-bushel land be- 
comes equally practicable at a rental payment of one bushel 
per acre. Competition compels payment of this rental. When 
cultivation extends to 23-bushel land, the 24-land pays one 
rental and the 25-land two. Mark that prices all the while 
stand at a level which remunerates the production on the 
poorest grade of land, and that the rent payment is the 
market price of the differential advantage measured from 
this point. 

69. Thus the Ricardian reasoning concludes that increasing 
population tends towards rise in rents, and that this rise meas- 
ures the tendency toward increasing difficulty in 
obtaining the requisite quantity of agricultural to^wice'? ^ 
products ; but that since market price gravitates 
always toward that point which compensates the producer at 
the margin where no rent is paid, rent cannot be said to add 
anything to market price or to be paid at the expense of the 
purchaser or consumer. Rent is the outcome of a competitive 



78 OUTLINES OF ECONOMIC THEORY 

distribution between landlord and tenant of tbat which the 
consumer could not avoid paying in any case. 

70. The foregoing statement contains the essentials of the 
Ricardian theory, so worded as to avoid unnecessary contro- 
versies. But it is important to note that the Ricardian reason- 
ing necessarily assumes as in cultivation a large body of land 
at or near the no-rent line, and the existence of other lands 
uncultivated and just beneath the line of cultivation, so that 
with every rise in market remunerations, lands pass from 
potential to actual competition, and with every fall, cross 
from actual to potential competition. A ready flexibility is 
thus given to the marginal line which would be impossible 
if all land were utilized, or if gradations from better to worse, 
instead of being gradual and regular, were irregular and 
marked. 

It is further worthy of note that the statement, as above 
worded, carefully avoids the imputation that market price is 
fixed or regulated by the marginal cost of production. Market 
price and marginal cost (sacrifice) are evidently commensurate 
quantities, but this fact does not indicate which is cause and 
which effect, if indeed cause and effect are accurately to be 
distributed. 

71. There are several factors in the determination of rent, 
each of which deserves close examination. First, there is the 
The different demand for agricultural products, — the dispo- 
factors in the sition on the part of human beings to refrain 
rent problem. fi-om producing other goods in order to produce 
agricultural goods, or to produce these other goods for the pur- 
pose of obtaining agricultural products in exchange. 

Second, there are possessors of opportunities for the produc- 
tion of these goods offering these opportunities competitively 
for rent or for sale. These offered opportunities are broadly 
termed " land." It must also be held in mind that there is a 
large body of uncultivated land, capable by change in market 
conditions of being brought into the lists of competitive pro- 
duction. 

Third, there are possessors of productive energies, — labour 



RENT OF LAND 79 



or capital — competitively seeking opportunities to supply the 
market demand for agricultural products. 

72. The economic demand, that is, the desire for satisfac- 
tions and the disposition to sacrifice in order to obtain them, 
is particularly strong and persistent in the case 
where room for subsistence and nourishment for prg^ucT^^ 
subsistence are concerned. The utilities of mere 
space are of small importance in respect to agricultural lands, 
but of great importance in respect to urban lands ; fertility 
and food-producing power are not of great importance as re- 
gards urban lands, but are of chief importance as regards 
agricultural lands. 

But it is an entire misconception of the problem of rent to 
omit from consideration certain other utilities of lands offered 
by landlords and purchased by tenants, — utili- 
ties of healthfulness and beauty and social ad- Qfr,wdMct°'^ ^ 
vantage, which do not manifest themselves in 
increase of the number of bushels or tons of agricultural 
product, or in the market price for which these bushels or tons 
are sold. These utilities are as necessarily, and perhaps as 
prominently, a factor in the rent of agricultural land as they 
are in the sale price. They are likewise prominent factors in 
the rent of urban lands, oftentimes as important as are the 
quality and cost of improvements, or as are the opportunities 
afforded for convenience or profit in business. 

It is, for example, within the experience of every one that 
the selling-price of a farm is often affected very considerably 
by the beauty or healthfulness of its location, by the general 
character of the neighbouring families, or by the proximity 
of schools or churches. It is commonly found that farms 
situated near towns or villages bear a high market value 
altogether disproportionate to the diminished expenses of 
transportation or to the greater convenience of market facilities. 
Considerations of this sort become of overshadowing impor- 
tance in the investigation of rents and values of city property. 
The location, with respect to sightliness, or neighbours and 
social privileges, or nearness to the business centre, is the 



80 OUTLINES OF ECONOMIC THEORY 

main element in the case. Eents and values climb to enor- 
mous figures on business streets, the value of the laud often 
greatly outweighing the expense of very costly improvements. 
Evidently, then, the explanation of rent by differences in the 
wheat-xDroducing power of land can be taken as illustrative 
merely. 

73. With more than an ample supply of land, not all land 
will be cultivated, and not all the residue utilized even for pas- 
(2) Supply of turage and forestry. Somewhere there will be 
land. land the use of which will command no pay- 

The margins. ment ; somewhere there will be land just worth 
using if no payment is required. This land, wherever and 
whatever it may be, is to be regarded as the land of marginal 
utility, from which the differential advantages and rent-bear- 
ing capacities of all other land may be measured. Under 
present conditions, however, this marginal land is not culti- 
vated land. It is land used for hunting and fishing, or pastur- 
age or forestry. In order, therefore, to avoid misconceptions, 
the term " marginal utility of land " is preferable to " margin 
of cultivation." Land which is at the margin of cultivation is 
almost of necessity rent-bearing land, since, under present con- 
ditions, land which would be worth while to cultivate at all, 
even without rent, would have an appreciable value for pur- 
poses of pasturage, forestry, etc. Were there, however, no 
non-rent-paying lands, — were the supply all utilized, — the 
above reasonings would not be greatly modified in the absence 
of effective combination among land-owners. The rent of the 
least desirable land, plus the value of the advantages of better 
land, would give the rental value of the better land. 

It does not rest then with changes of customs or laws or 
institutions to abolish rent. So long as different parcels of 
land offer differing degrees of advantage for human purposes, 
and the supply of the best land is limited, rent will continue 
to exist. It is indeed possible enough that the handling of 
land should by law or custom be confined to owners, that rent- 
ing cease, or that the State become landlord, or that the State 
by taxation appropriate the rental value in whole or in part. 



RENT OF LAND 81 



But these methods would none of them destroy the differential 
advantages attaching to land. 

It is to be observed, however, that our investigations have 
been mostly limited to the forces determining rent at any given 
time, and that we have for the most part post- g^ppiy of 1^^^ 
poned any examination of the historical question merely a present 
with its associated problems of justice, and of *^^^' 
the economic outlook with its associated population problems. 
]SI"or have we departed widely from the Ricardian doctrine. 
We have somewhat enlarged the Eicardian conception of 
products to include the utilities not properly termed agri- 
cultural attaching to the use of land. We have substituted as 
the vanishing point of rent the margin of usefulness in place 
of the margin of cultivation. Lastly, and more importantly, 
we have omitted to investigate what portion of land or rental 
values has resulted directly or indirectly from human agencies, 
— or what portion is due to the original qualities and pecul- 
iarities of the land, — or what subtraction or destruction 
of these original qualities men may have worked. The Ei- 
cardian statement defines rent as " that portion of the prod- 
uce of the earth which is paid to the landlord for the use 
of the original and indestructible powers of the soil." It is 
clear enough that some of the original powers of the soil are 
as capable of destruction as they are of improvement. But for 
the purposes of our present inquiry, it is unimportant to deter- 
mine, even were it possible, the degree in which the present 
condition of the land is due to the beneficial action of birds, or 
men, or corals, or insects, or to what extent deterioration is due 
to men, or animals, or insects. 

The factors which enter into the determination of the value 
of land, and the value of its temporary use, are very complex. 
Present usefulness depends in part on the quality of past treat- 
ment. In this respect, however, there is nothing peculiar in 
principle about land. The question of land and. rental values 
remains, like all questions of value, a matter on the one hand 
of advantages obtainable, and on the other of sacrifices sub- 
mitted to in the adjustment of demand and supply. It is 



82 OUTLINES OF ECONOMIC THEORY 

to be expected that as stores of capital, arts of cultivation, 
methods of transportation, and habits of consumption are 
modified, land values will undergo great variations in the 
aggregate, as well as relatively to each other. This, however, 
is not peculiar to land, and will not serve as a denial of the 
laws of rental and land values. Wampum, sacred relics, talis- 
mans have, with the lapse of years, almost lost their value. 
Every attic is filled with articles which have outlasted the 
human desires served by them at an earlier time, or which 
have been superseded by appliances more effective to the same 
or similar ends. This perpetual flux in prices characterizes in 
varying degree all exchangeable objects. The mill owner finds 
his machinery out of date, though not outworn; his build- 
ings possibly useless for their original purpose by reason of 
changes in lines of transportation, in the sources of supply, in 
the centres of consumption, or in habits of consumption. The 
mill, if operated, may pay returns only upon the floating cap- 
ital applied, the fixed capital being correctly considered as 
lost. It may be that the rental value of an improved farm is 
no more than its value for purposes of household occupancy, or 
it may be that the rental value is not greater than the value 
for purposes of cultivation, the opportunity for household occu- 
pancy being neglected and valueless. The entire usefulness 
of agricultural land may be due to drainage operations, or may 
be considerably diminished by such operations. No parcel 
of land exists, the utilities of which can be asserted to be per- 
manent and indestructible. That which was once regarded as 
the best land, and which was the best, in view of the arts and 
appliances and conditions of that time, may have been at an 
earlier date, and may again become, not worth the using. "A 
mere increase in the demand for produce may invert the order 
in which two adjacent pieces of land rank as regards fertility. 
The one which gives the smaller produce when both are uncul- 
tivated, or when the cultivation of both is equally slight, may 
rise above the other, and justly rank as the more fertile when 
both are cultivated with equal thoroughness. In other words, 
many of those lands which are the least fertile when cultiva- 



RENT OF LAND 83 



tion is merely extensive, become among the most fertile wlien 
cultivation is intensive. . . . We therefore cannot call one 
piece of land more fertile than another until we know some- 
thing about the skill and enterprise of its cultivators, and the 
amount of capital and labour at their disposal ; and until we 
know whether the demand for produce is such as to make 
intensive cultivation profitable with the resources at their dis- 
posal. If it is, those lands will be the most fertile which give 
highest average returns to a large expenditure of labour and 
capital ; but if not, those will be the most fertile which give 
the best returns to the first few doses. The term 'fertility' 
has no meaning except with reference to the special circum- 
stances of a particular time and place." (Marshall.) 

74. Possessors of productive energies are of unequal skill, 
unequal strength, unequal capacity, and inclined to different 
estimates of the importance to themselves of the 
subsidiary utilities above set forth. Each who 

betakes himself to agriculture does so because agriculture 
offers to him, as he thinks, in the goods obtainable through 
exchange, plus the goods of nourishment directly obtained, 
plus advantages of health and comfort and convenience and 
beauty, plus immunities from inconveniences of various kinds, 
the maximum of advantages in proportion to the labour and 
capital applied. Each might have betaken himself to cloth- 
making or machine-making, or to any other one of the count- 
less occupations of human energy. Those who become renters 
or purchasers of land for agricultural purposes, become so be- 
cause, under all the conditions of personal aptitudes, personal 
tastes, amount of capital in hand, market prices of products, 
the esteem in which the employment is held, etc., they think 
the best to be had for themselves out of agriculture. 

75. These men enter the real-estate market competitively, as 
buyers of the temporary or permanent use of land ; that is, as 
renters or as purchasers. They confront land- 
owners who offer all sorts and qualities of land, 

with all sorts and degrees of improvements, affording all de- 
grees and all kinds of advantage. There is, then, nothing 



84 OUTLINES OF ECONOMIC THEORY 

peculiar in tlie fact that different lands sell or rent at different 
prices. There is nothing peculiar in principle in the sale of 
the temporary use of land as distinguished from the permanent 
use. Lands which, in view of the market prices of products, 
of fertility, location, healthfulness, and beauty, offer no induce- 
ments for purposes other than pasturage or forestry, will bear 
no rent for other than their value for these purposes. If, 
under all the circumstances, fertility and the market prices of 
products being the most important, the land is desirable for 
cultivation, it will bear a rent at least equal to the rental value 
for pasture, forestry, hunting, or fishing. Other lands will 
bear higher rents in proportion to their differential advan- 
tages. 

76. It is evident, however, that in the competitive buying or 
hiring of lands, the advantages obtainable from the possession 
of particular lands will tend to be cancelled, and will ordinarily 
be mostly cancelled, by the higher rents or prices paid therefor, 
but that the advantages obtained from the possession of the 

land by reason of the exceptional qualities in 
Renters' quasi- g]^\]i^ capacity, or taste of the occupier, will not 

tend to be cancelled by rent, excepting in so far 
as the skill, etc., become general. That is to say, the remu- 
nerations of the cultivators differ as widely as differ the 
cultivators. 

77. All remuneration for personal activity, without the in- 
tervention of an employer, will be recalled as covered by the 

term " profits." The profits, then, of cultivators 

Some monopoly ^-^^^ ^g widely as differ the cultivators. Who- 
features. -^ 

ever obtains the use of land is held to pay 

therefor its rent or value as determined by market adjust- 
ments — by the amount which another will pay if he will not. 
Each piece of land attains its rental value by virtue of its 
differential of advantage over the marginal land. But because 
of the great diversity of advantages offered by different lands, 
the rate at which this differential shall be appraised is in con- 
siderable degree a distinct question for each piece. Similar 
lands are in some degree in competition with each other, — as 



EENT OF LAND 85 



are different horses, for example, — but in considerable degree, 
also, the owner of each piece of land stands as a monopoly- 
possessor offering his commodity to competitive bids. What- 
ever the tenant obtains from the land as net return after de- 
ducting rent, interest, and the outlays of cultivation, is to be 
ascribed to him in his role of productive agent. So, if there 
is something in the position or quality of the land peculiarly 
adapted to his condition or abilities, whatever he is able to get 
from the land more than would another cultivator, is to be 
attributed to himself as producer rather than to the land as 
opportunity. 

78. We have found, then, that an analysis of the forces 
determining rent at any particular time reduces itself to an 
application of the notion of value to questions concerning 
the occupancy of land. The law of rent is the law of value 
to the extent that both rest upon demand and supply, that 
both are the working out of that compromise between the 
indisposition to work and the desire for the Rent doctrines 
results of work which manifests itself in the in some degree 
tendency to follow the line of least resistance, ^"^ ^^^' 
i.e. of least sacrifice. The differences in the hire of land rest 
upon differences of advantage in use. 

But we have seen, also, that while the law of demand and 
supply is equally applicable to all commodities, there are im- 
portant differences in commodities in point of 
the possible variations in the volume of demand ^^^i^^ ^^^^ 
and in the volume of supply, and in point of the 
terms and conditions of increase in either demand or supply. 
We have seen that if the arts of agricultural production — the 
term being understood to include transportation — remain un- 
changed, an increased supply of product is possible only in 
conformity with the law of diminishing returns ; that is, only 
upon terms of increased proportional expenditure of productive 
energy. We shall be called to observe, in a subsequent chap- 
ter, that with many other commodities, a tendency towards in- 
creasing returns is equally manifest by reason of the increased 
efficiency of the productive energies applied. 



OUTLINES OF ECONOMIC THEOEY 



79. The very existence of rents is conditioned upon this 
commonplace agricultural fact that increased labour and capi- 
tal applied to land bring a less than proportional return. This 
fact we have called the law of diminishing re- 

Relation of ° 

population, ma- turns. In large measure, the past and the future 
chinery, and ^f j.gj^^ movements are to be deduced from this 

law. The increases in population which have 
already taken place have enlarged the demand for the products 
of land, and, by compelling the cultivation of less desirable 
lands, have necessarily brought about an increase in rent pay- 
ments corresponding to a larger differential of advantage as 
measiTred from a lower margin of utility. Future increases of 
population must likewise be attended by increased rent, unless 
their influence is overbalanced by other tendencies. 

There are such other tendencies ; in truth, the law of dimin- 
ishing returns falls far short of a full theoretical equipment 
for the analysis of rent movements. This law points merely 
to one very important fact in the supply aspect of the problem. 
But diminishing returns are the condition upon which rents 
depend rather than their ultimate cause. As we have already 
seen, and shall repeatedly see, no economic explanation in 
terms of supply is exhaustive or satisfactory. The volume of 
the demand for agricultural products must be examined before 
the tendencies characteristic of supply can safely be estimated. 
How rapidly, for example, rents may advance with an enlarging 
market for products, must depend upon the measure in which 
demand will be retired by rising prices. How rapidly rents 
may be made to fall by the opening up of new lands, is incap- 
able of estimate till something is known of the degree in which 
falling prices may be expected to attract a larger consumption. 
All rent tendencies must be studied not alone from the point 
of view of the facts peculiar to supply, but as well from the 
point of view of the peculiar nature of the demand. 

Commodities vary greatly in what is known as the elasticity 
of demand. With falling prices, the demand for books, for 
example, greatly expands, while higher prices would be met 
by greatly decreased consumption. Where demand is very 



RENT OF LAND 87 



elastic, small changes in price work large changes in consump- 
tion. It follows, then, that small changes in supply must work 
small changes in price, while large changes in supply work 
only limited changes in price. 

But where the demand is inelastic, the reverse of all this is 
true. Small increments in supply are marketable only at con- 
siderable decrease in price, while large increases in supply 
work enormous price reductions. Much that is peculiar to 
rent movements is to be explained by the fact that the demand 
of society for the products of the earth, and particularly for 
agricultural products, is extremely inelastic. Consumption of 
food products cannot be very largely increased, nor is it pos- 
sible without acute suffering greatly to reduce consumption. 
It is true, that in considerable measure one product may be 
substituted for another by reason of minor changes in price, 
but the total volume of consumption adjusts itself to the total 
volume of supply only through relatively great price fluctua- 
tions. Were the fact otherwise, advances in rents following 
upon increased population would have been much less con- 
siderable, and a fall in rents resulting from the opening up of 
new supplies of land would be relatively unimportant. "^ 

Bearing in mind that increasing supplies of agricultural 
products are unmarketable unless at rapidly falling prices, it 
becomes evident that all causes tending to increase the per 
acre productiveness of land will mostly manifest themselves in 

1 Attempt has been made under the formula known as Gregory King's law 
to express mathematically these relations of price to supply. Necessarily 
under modern conditions of commerce the whole world must be included in the 
reckoning. Statistics for this purpose are not obtainable, and the conclusions 
must, therefore, be taken as, at best, only loose estimates. With defective 
harvests, prices are said to rise as follows : 

A defect of 1 tenth raises prices 3 tenths 

2 tenths 8 " 

3 " 16 " 

4 " 28 " 

5 " 45 " 

Taken as applied to any one cereal product, this is probably an overstate- 
ment. As applied to the total of agricultural products, it probably errs 
greatly in the other direction. 



88 



OUTLINES OF ECONOMIC THEORY 



the abandonment of marginal lands and the decrease of rental 
totals. Thus all progress in agricultural skill, — like better 
methods of crop rotation, or improvements in the applications 
of chemistry to the production of fertilizers, — by which the 
per acre output of land is increased, will tend toward the dis- 
use of the poorer qualities of land. Likewise all improve- 
ments in transportation facilities by which new and more 
fertile lands are brought into use and the abandonment of 
poorer lands made possible, must reduce the rent differential. 

And even with the new lands only equally fertile with the 
old, the reductions in the cost of transportation would reduce 
LAND. the differential of advantage enjoyed by the 

lands nearer the market. Not less land 
would be used, but the difference in advan- 
tages would be lowered. In the diagram the 
transportation charges of 2, 4, 6, 8, etc., give 
rentals of 14, 12, 10, etc. Reducing the cost 
of transportation by one-half lowers the dif- 
ferentials to 7, 6, 5, 4, etc. It is true that this 
cheaper transportation would cause some of 
the more distant lands to be brought into 
cultivation. But only a small increase in 
products could be marketed without so great 
a fall in price as seriously to affect rents 
generally. 

Assuming, however, that the land opened up is of distinctly 
inferior quality, one might look for a rise in rents. But the 
question is whether this wider differential of fertility can be 
sufficient to more than offset the diminished differential of 
transportation. 

Suppose that the land is 30, 28, 26, 24, etc., in productive- 
ness, and that the transportation charges are 2, 4, 6, 8, 10, etc., 
as in the previous illustration. Each grade of land from the 
margin, increases in rent by 2 for differential of fertility, 
and by 2 more for differential of freight. 

If now the freight differential falls to 1 for each grade, the 
rent payments will fall from 20 -|- 16 -f 12 -|- 8 4- 4 to 15 + 



14 2 


30 


1 


7 


12 4 


30 


2 


6 


10 6 


30 


3 


5 


8 8 


30 


4 


4 


6 10 


30 


5 


3 


4 12 


30 


6 


2 


2 14 


30 


7 


1 


16 


30 
30 


8 





EENT OF LAND 



10 + 5 = 15 

8 + 4 = 12 
6 + 3= 9 

4 + 2=6 
2 + 1=3 



12 + 9 + 6 +- 3. Even could cultivation extend two grades 

lower without a material fall in prices, this would carry the 

rent payments only to 21 + 18 + 15 + 12 + 9 + 6 + 3. In 

fact, however, prices would greatly 

fall upon the assumption of this 

extension. These lands could no 

longer be treated as 30-, 28-, etc. 

(bushel) times one (dollar) lands. 

The 2, 4, 6, 8, etc., as differential 

in bushels, would still remain, but 

these bushels would have greatly 

shrunk as measured in terms of 

market value. 

It is worth remarking, also, that 
this tendency of improved trans- 
portation facilities to lower rents 
can be asserted only where mar- 
ginal lands are rendered accessi- 
ble. In the absence of new lands, as for example upon a densely 
inhabited island, or in a country mostly cut off from outside 
influences, as is China, lower outlays for transportation must 
inure entirely to the benefit of the landowners. It is not 
even true that improvements in the art of agriculture neces- 
sarily lower rent, if these improvements are such as to apply 
solely or mostly to the better lands. If for example there 
were in cultivation 





20 


LAND. 


+ 10 = 


30 


8+ 8 = 


16 


28 


6+ 6 = 


12 


26 


4+ 4 = 


8 


24 


2+ 2 = 


4 


22 
20 
18 
16 
14 



3 units of 30-bushel land 

4 " " 29- -" " 

5 " " 28- " " 

6 " " 27- " " 



and some method were devised of doubling the output of 
classes 1 and 2, it would still remain necessary to cultivate 
some of the 27-bushel land, while the 30 and 29 lands would 
have become 60- and 58 lands with their rent differential 
measured from the old margin of 27-. 

80. In no case, then, is it safe to assume that the mere fact 



90 



OUTLINES OF ECONOMIC THEORY 



of the extension of cultivation to inferior lands means of 
necessity an increase in rents. For anything like an accurate 
forecast of rent tendencies in any case, there is required a 
Gregory King's law of altogether unattainable accuracy. Were 
the demand for agricultural products as elastic as is the de- 
mand for books, or sewing-machines, or bicycles, improved arts 
of transportation would probably raise rents. If, for example, 
rent differentials were due one-half to lower expenses of trans- 
portation, and these expenses were reduced by one-half, it 
would become practicable to cultivate much larger areas of 
land, if the demand for products were such that the prices 

should not sharply 
fall. In this case, 
rents would in- 
crease in the total. 
If, for example, 
all the land better 
than the 22 is 
under cultivation, 
transportation differentials accounting for one-half the rent 
payments, and if these charges fall by 50%, rents may ad- 
vance, if it is assumed that the demand is sufficiently elastic 
to sustain prices so that all lands of the 19 quality or better 
may remain in cultivation. Upon the original conditions the 
23 lands were marginal. 



30 
26 
24 


30 
26 
24 


29 
26 
24 


29 
26 
24 


28 
26 
24 


28 
25 
23 


27 
25 
23 


27 
25 
23 


27 
25 
23 


27 
25 
23 


22 
20 


22 
20 


22 
20 


22 

20 


22 
20 


21 
19 


21 
19 


21 
19 


21 
19 


21 
19 



5 units of 24-bushel land paid 5-busliel rent -|- 5-freight rent 



5 " 


" 25- " 


it I 


10- " 


" 10- " 


5 " 


" 26- " 


" 


15- " 


" 15- " 


4 " 


" 27- " 




16- " 


" 16- " 


2 " 


" 28- " 


u 


10- " 


" 10- " 


2 '• 


" 29- " 


U 4 


12- " 


" 12- " ' 


2 " 


" 30- " 


U 1 


14- " 
82- " 


" 14- " 

" 82- " ' 



RENT OF LAND 



91 



Under the new conditions, 

5 units of 20-bushel land pay 5-bushel rent + 2J-freight rent 



5 




" 21- 


6 




" 22- 


5 




" 23- 


5 




" 24- 


5 




" 25- 


5 




" 26- 


4 




" 27- 


2 




" 28- 


2 




" 29- 


2 




" 30- 





10- ' 




' 5- 






15- ' 




'2- 






20- ' 




' 10- 






25- ' 




' in- 






30- ' 




' 15- 






35- ' 




' 17^ 






32- ' 




' 16- 






18- ' 




' 9- 






20- ' 




' 10- 






22- ' 
232- ' 




' 11- 
' 116- 





The supply of products has risen from 60 -f 58 -|- 06 -|- 108 -f- 
130 + 125 + 120 + 115 = 772, to 772 + 110 -f 105 + 100 -f 95 = 
1175. Under the old conditions, 82 bushels could be claimed 
by the landlord as rent ; under the new conditions, 232 bushels. 
If these 232 can be sold for more than were the 82, rents have 
risen irrespective of 34 increase in freight differentials. Ulti- 
mately, then, we fall back upon the character of the demand 
as the critical point in our rent investigation. The law of 
diminishing returns explains the existence of rent only after 
demand is assumed. The degree of rise or fall in rent can be 
guessed at only in view of the demand. 

Some questions we can hardly even guess at. It is com- 
monly assumed that improvements in farm machinery work 
in line with improved, fertilizers and improved methods to 
reduce rents. This is correct for such machinery as increases 
the per acre output. But for the most part, these labour-saving 
devices are not land-saving devices. They increase the amount 
of land employed in producing a given amount of product; 
thereby they lower the margin of fertility, exactly reversing 
the effect of fertilizers. If rents fall, it must be from the fact 
that cultivation is carried so far upon inferior soils as, through 
a considerable expansion of supply, to lower prices, and to do 
this to such an extent that the influence of an increased differ- 
ential in product is overcome by the necessity of marketing 
the products at lower prices. 



OUTLINES OF ECONOMIC THEORY 



This case is parallel to that where improved transportation 
facilities carry cultivation to poorer lands, excepting that with 
the machinery there is a distinct and important first-effect 
toward the use of more rather than of less land, irrespective 
of any increase in total output. The influence of machine 
methods upon rent is more nearly parallel to that of lower 
rates of interest. The product sells more cheaply by reason 
of lower production-sacrifices at the new margin, but the 
new margin is a lower margin. The lower market prices cor- 
respond solely to lower outlays in the direction of labour or 
capital. If rent is not increased as measured from this lower 
margin, it is because such a fall in prices has occurred as to more 
than offset the wider differential in fertility. The problem is 
to determine the point of adjustment of two opposing forces, 
the strength of neither of which have we the ability to estimate. 

Mere space values of land must, however, be expected to 

advance with an increase in population, without reference to 

any improvements in agricultural arts. Better 
Urban rents. „.,..„ , , . . 

facilities tor suburban transportation, on the 

other hand, must tend to the reduction of urban rents, and of 
the aggregate of land values, and possibly to the reduction 
of the tendency towards booms, with the resulting unsteady 
growth of population centres. 

81. Substantially, nothing has thus far been said of the so- 
called unearned increment. It is, however, evident that a con- 
siderable portion of the advantages offered by 
land for human purposes, exist by reason of the 
natural and original qualities of the land ; that another con- 
siderable portion of these advantages arise from the possibility 
of applying to the land the great store of scientific and prac- 
tical knowledge which the race has acquired, as well as from 
the enjoyment of the means of transportation, the social 
privileges, and the conveniences and comforts which society 
has created ; and that another considerable portion of these 
advantages would entirely fail to exist but for the oppor- 
tunity offered by society of exchanging agricultural for other 
goods. It is clear, then, that in many cases and in large 



KENT OF LAND 93 



degree, the value of land is not the creation of the owner. As 
far as he is concerned, there exists an unearned increment. It 
is true, also, that in some degree there exists a value in land 
which, as regards the race at large, is unearned, — in the exist- 
ence of which the race has had no part other than of mere pres- 
ence. There is also equally clearly a value in some land — 
in much land — which is to be ascribed to the efforts of the 
possessor and preceding possessors. And it is clear, also, that 
unearned decrements follow certain social improvements, dis- 
coveries, and changes in habits of consumption. Agricultural 
lands in Europe and in the eastern states of America have 
fallen considerably in rental and sale value during the last 
thirty years. 

Suggestive Questions 

Suppose the State owned the land, should we pay any rent ? 

Do we now in any way pay what amounts to a land rent to the State ? 

If you were a renter, and the landlord forgave you your rent, would 
you have to, or would you, sell your products at lower prices ? 

Suppose all land rents were forgiven ; how would this affect prices ? 

What does a perpetual lease without rent amount to ? 

What effect would the general forgiving of rents have on the margin 
of utility ? On demand for products ? On supply of products ? 

What effect on prices from a tax on all land, marginal or otherwise ? 
What effect on consumption of products ? 

Effect of a percentage tax on rents ? 

Would the landlord be able to shoulder it off upon the tenant ? Ten- 
ant upon consumer ? 

If a large body of fertile land — a new continent, for example — were 
discovered, what effect on rents in Europe ? 

Rents and land values, rural, have largely fallen in Europe. Why ? 

What would be the tendency of rents on the new continent ? 

Which of the tendencies would predominate in importance ? Why ? 

What effect on supply of products ? 

On margin of utility of land ? 

On social dividend ? On average comfort ? 

If the land of the world were all owned by one man or company, could 
rents be raised profitably for the owner ? 

Is there any reason why landowners cannot combine ? 

Would some land be thrown out of use ? Why ? 

Who would lose the rent on this ? 

If a large amount of land were taken from agriculture for parks, etc., 



94 OUTLINES OF ECONOMIC THEORY 

what effect would this have on the aggregate of rents ? On prices of 
products ? 

Is it the increase of rent or the decrease of supply which causes prices 
to advance ? 

For rents to affect prices, the supply must in some way be modified so 
as to bear upon buyers near the margin. How would a general advance 
in rents do this ? 

What will the tenant do if prices fall ? 

Will all tenants do this ? 

Which ones ? 

What bearings have producer's rents upon this question ? 

If you were a farmer with a large farm, would you hire men to work 
for you ? Why ? How many ? 

When and where would you stop ? 

Could you fix prices of products ? Wages of employes ? Rents ? 

What is your rSle as far as price is concerned ? 

What bearing has productivity of marginal land on agricultural wages ? 

What bearing have wages in other employments on agricultural wages ? 

An increased demand for agricultural produce exercises what effect on 
the margin of utility of land ? On rents ? On prices ? On agricultural 
wages ? On wages generally ? 

Is the wages question the solution of the fraction social dividend over 
social divisor ? 

Interpret the following : 

social dividend — rent — interest 

wages = 

wage-earners 

What would you do with taxes here ? 

What makes a town lot valuable ? 

Who made it valuable ? 

Who gets the advantage ? 

What do you mean by the unearned increment ? 

In what sense are the interests of landowners opposed to the interests 
of all other classes of society ? 

Read in the Encyclopedia articles on Malthus and Malthusianism. 

Prove that rent does not commonly add to price. 

In justice ought the tenant to pay rent upon the improvements which 
he himself has made upon the land ? 

How may he be compelled under free competition (rack rent) to do this ? 

What effect on the condition of farmers ? 

What effects upon the habits of husbandry ? 

What relation do you perceive to the history of Ireland ? 

What effect on rents from improved machinery ? 

What effect on rents from improved methods and science ? 



EENT OF LAND 95 



What effect on rents from improved transportation ? 

What effect on social dividend from improved machinery ? 

What effect on social dividend from improved methods and science ? 

What effect on social dividend from improved transportation ? 



NOTES 

The condition of agriculture in a new country is often to some extent 
similar to that of mining ; so far as tillage is applied to naturally fertile 
lands, whose fertility is gradually exhausted by the comparatively unla- 
horious methods of cultivation, which are also the most economical 
methods so long as the land is plentiful and cheap. But this state of 
things passes away as the country gets filled ; and at any rate, after a 
certain density of population has been reached, the most economical are 
such as continually maintain the productiveness of the land cultivated. 

— SiDGWicK, Principles, p. 380. 

On the other hand, services which land renders to man in giving him 
space and light and air in which to live and work, do conform strictly to 
the law of diminishing return. It is advantageous to apply a constantly 
increasing capital to land that has any special advantages of situation, 
natural or acquired. Buildings tower up towards the sky ; natural light 
and ventilation are supplemented by artificial means, and the steam lift 
reduces the disadvantages of the highest floors ; and for this expenditure 
there is a return of extra convenience, but it is a diminishing return. 
However great the ground rent may be, a limit is at last reached, after 
which it is better to pay more ground rent for a larger area than to go on 
piling up story on story any further ; just as the farmer finds that at last 
a stage is reached at which more intensive cultivation will not pay its 
expenses, and it is better to pay more rent for extra land than to face 
the diminution in the return which he would get by applying more 
capital and labour to his own land. — Marshall, Ec. of Ind., p. 122. 



■R^l^T— Continued 

82. The relations of the rent of land and of the margins of 
utility and cultivation to the prices of agriculttiral products 
deserve examination. The statement of Ricardo is in most 
respects correct. '' Corn is not high because rent is paid, but 
rent is paid because corn is high. . . . No reduction would 
take place in the price of corn although landlords should 



OUTLINES OF ECONOMIC THEOEY 



forego the whole of their rent. If the high price of corn were 
the effect and not the cause of rent, prices would be propor- 
tionally influenced as lands were high or low, and rent would 
be a component part of the price. But that corn which is pro- 
duced by the greatest quantity of labour is the regulator of 
the price of corn; and rent does not and cannot enter in the 
least degree as a component part of the price." That is to say, 
that corn, the cost of production of which is more than remu- 
nerated by the market price, is the only corn which affords rent, 
rent, therefore, being paid at the expense of the producer's 
profits, and not by means of an increased price to the consumer. 
83. The only exception to be taken to this statement is to 
the proposition that the corn which is produced by the greatest 
Does margin of quantity of labour is the regulator of the price 
cultivation fix of corn. As has been shown in previous pages, 
^"'^^' the more accurate statement would be that the 

price of corn is the regulator of the quantity of productive 
energy devoted to producing corn. But these two statements 
do not materially differ for our immediate purpose ; they may 
perhaps profitably be combined as follows: If a cultivator 
finds that upon a certain piece of land he can, with the appli- 
cation of a certain quantity of productive energy, and with the 
payment as rent of what the land would be worth for pasturage, 
forestry, etc., produce at average market prices a product suffi- 
cient to. decide him to continue in this line of production, and no 
more, he cannot and will not continue to pay for the land more 
than the above-mentioned non-agricultural rent. He can and 
will, ordinarily, consent to pay a higher rent for other and better 
land, to the extent that the other and better land gives to the 
productive energies applied larger returns in marketable and 
non-marketable advantages; and if this man is that producer 
to whom other productive employments offer comparatively 
the greatest inducements, those prices for products which 
will induce him to continue in working this minimum-rent 
land will be the average market prices. Ultimately speaking, 
these prices are not prices representing the highest cost of 
production of the necessarily most expensive portion of the 



EENT OF LAND 97 



supply; they are the prices M^hich will remunerate the highest 
sacrifice necessarily involved in furnishing the supply, — sac- 
rifice being, of course, understood to contemplate the remun- 
erations possible in other employments. 

84. From the point of view, however, which we have 
adopted, treating rent as the compensation for the use of land 
and its improvements, — excluding from rent all Relation of 
payments for the right to impair or exhaust the improvements to 
land or improvements, such payments being as- ^"''^' 
similated to the case of a partial purchase, — something must 
be said of the relation of rent payments to prices, so far as 
such payments are remuneration for the use of improvements. 
Clearly if improvements cannot be removed, no reason exists 
relative to rent for regarding them as other than land. To 
impair or to destroy them influences rent as would any other 
injury done to the land. Payment for the use of them adds 
nothing to price, price being remuneratory to the producer at 
greatest continuing sacrifice, and it being irrelevant to his sac- 
rifice whether he hires poor land at low rent or better land at 
correspondingly higherj-ent. 

With regard to contemplated improvements, it is clear that 
they will not be made unless it is believed that the outlay will 
be compensated by an increased product to the cultivating 
owner, or by an increased rent to the landlord ; and it is clear 
that this compensation must, all things considered, seem as 
advantageous to the maker of the improvements as that ob- 
tainable from any other use of the capital applied. So if 
capital already applied is capable in some degree of removal, 
it will be removed unless it can with equal advantage be con- 
tinued in its present use. In these two cases, capital applied 
to land receives, or is expected to afford, returns after the 
analogy of interest rather than of rent. But confusion is 
possible in determining whether these returns do or do not 
enter into price. Put in other words, the question is, whether 
prices are high because of this interest element in rent, or 
whether the interest element is paid because prices are high. 
Evidently this is a wider qu.estion than the rent question as 



OUTLINES OF ECONOMIC THEORY 



ordinarily conceived. Not only the relations of interest and 
rent to prices, but as well the relations of wages and profits, 
are concerned. It is difficult to see how wages or interest can 
be held to enter into price, if rent does not enter. Yet as 
Ricardo has clearly demonstrated, ^ rent does not enter, inas- 
much as the cancellation of rent would neither increase the 
agricultural product nor decrease the demand for it. 

85. If we assume, for purposes of theory, an entire absence 
of non-rent-paying land, and the payment of a considerable 

rent on even the poorest land, the question 

If there were no -^i^ether rent enters into price becomes alto- 
no-rent land. ^ 

gether unanswerable other than by way of ob- 
jecting to the question. In truth, it involves an entire inversion 
of logical theory. It can Avith equal correctness be answered 
by yes or no. So far as by its sale or rental value any land is 
proved to aid in production, the use of it must be remunerated 
in the selling price of the product ; in this sense rent enters into 
price. Likewise profits must at least remunerate the continu- 
ing sacrifice of the marginal producer; they may much more 
than remunerate any other producer. The extent of society's 
disposition to sacrifice other utilities in order to obtain agri- 
cultural utilities determines the quantity and kind of produc- 
tive energy which may be remuneratively applied to agriculture 
instead of to something else, as well as the amount of rent 
which will be competitively paid to any landlord. 

86. The fact is that, from the social point of view, the sac- 
rifice or cost-of-production notion is in danger of stopping at 

superficial conclusions. So far as it can rightly 
What does cost ^ ,...,. . , • t 

or sacrifice of indicate anything, it indicates the price at which 

production ^j^g producer can as advantageously to himself 

produce the utility in question as to produce 

something else. But wages are the reivard of the labourer; 

interest the reward of the capitalist ; rent the reivard of the 

Wages— interest land-owner. Wages are not the cost to the 

and rents are labourer of that which he produces, they are 

results. ^YiQ result of his efforts ; they are rarely even 

the measure of his sacrifice in refraining from the production 



KENT OF LAND 99 



of something else, since he may be altogether incapable of 
other work, or indisposed thereto, without of necessity re- 
ducing his remuneration. Musicians and artists perhaps illus- 
trate this fact. 

The argument will be made clearer by recurring for a mo- 
ment to the discussion of value (Section 38). We have seen 
that the value of any good is the measure of the sacrifice 
submitted to in exchange by purchasers, and that this sacri- 
fice fixes itself generally at considerably above what would be 
necessary to divert from other employments a large proportion 
of the productive energies engaged in this particular line, and 
ordinarily at considerably below the sacrifice which would be 
submitted to by some or all of the consumers, were such sac- 
rifice necessary in order to obtain the good in question. On 
the other hand, no producer will continue in this line of pro- 
duction, if he can, preferably for himself, as he thinks, do 
something else ; what he gets more than he could get else- 
where will be due to his ability or his good fortune. 

Values, then, do not correspond to producers' sacrifices, 
except in so far as they tend to remunerate that one high- 
est sacrifice necessarily involved in supplying the demand. 
Kormal value is the exact remuneration for this marginal pro- 
ducer only. The commodity exactly compensates the sacrifice 
of that purchaser only who was least disposed to sacrifice 
other products therefor ; that is to say, of that purchaser 
who among actual purchasers placed the highest estimate on 
the other goods of which he deprived himself. Value re- 
sults primarily from the disposition of purchasers, if neces- 
sary, to undergo sacrifice. Producers competing with each 
other get therefrom such advantages as they may ; in compet- 
itively seeking these advantages, they force down market 
values to such a point that, normally, some few producers 
— in theory one producer — derive no advantage therefrom, 
as compared with the advantages possible in other lines of 
production. But as to no other than these producers at the 
margin, can the term cost or sacrifice of production correctly 
indicate anything. 



100 OUTLINES OF ECONOMIC THEORY 

87. If now we attempt an analysis of the relation to prices 
of non-marginal lands under cultivation by their owners, we 
shall meet with some striking corroborations of the conclusions 
already drawn. 

Assume a case of land of high rental value under cultiva- 
tion by its owner. That the land should be retired from culti- 
Prices in relation nation is out of the question. By some person 
to non-marginal or other, in some crop or other, this land is cer- 
^^ ^' tain to be utilized. Doubtless there is land 

somewhere in the world which would go out of cultivation, if 
prices for the product to which it is applied and to which it is 
best adapted should fall. But our cultivator has no concern 
with this fact, or with rental values in any way. No matter 
whether his land would rent for little or much, it is worth 
working, and his concern is merely to choose the best-paying 
crop for cultivation. Cost of production is for him exactly 
what it is for the cultivator of marginal land, — the sacrifice 
of other values possibly obtainable by the application of the 
same productive energies, — with this difference, however, that 
with the non-marginal land it is a question of one agricultural 
product as against another, — with the marginal land, a ques- 
tion of agriculture as against some other occupation. Each 
cultivator produces in response to the social demand, and pro- 
duces what best pays him in view of current or prospective 
prices, enlarging his output as far as it can be done without 
an outlay too great for the market prices, and without dis- 
placing more remunerative products. 

Well, what of it ? This of it, — agriculture is not a mere 
question of wheat-raising. Beans, corn, pumpkins, and rad- 
ishes must be included in the reckoning. The 
What of it? . , .„ . 1 , , . 

marginal sacrince m wheat or bean production 

may as well be at one grade of land as at another. There is 
much land so well adapted to other things as to be too good 
for beans. It is true that any product raised upon marginal 
land must be raised at the marginal sacrifice, since if the price 
falls, or a rent be imposed, production must cease and the land 
lie idle. But many agricultural products are not produced upon 



RENT OF LAND 101 



the poorest of the cultivated land; and, as has already been 
pointed out, lands at the margin of utility are rarely, if ever, 
cultivated. A fall in the price of wheat or maize would 
change more land to other agricultural uses than it would ex- 
clude from any sort of agricultural uses. 

88. A few facts emerge from this discussion with helpful 
clearness. Neither rent, nor the margin of cultivation, nor 
the margin of utility has much to do as a determining 
cause with market value. The marginal sac- value is a resui- 
rifi.ce principle, as bearing on values, does not tant - rents and 
of necessity point to land at or near the margin ^^m^vTiire*^^^"" 
of rent disappearance. The margin of utility of Demand is 
land is the key to rent determinations, but analy- P"™ary. 
sis of demand for products and of supply of land must explain 
the determination of this marginal utility. The causes which 
lie back of high prices, lie back of high rents. Prices serve as 
an intermediate step in explaining rent. Neither rent nor 
margin of utility of land, nor margin of sacrifice in produc- 
tion, can explain the phenomena of values as a question of 
ultimate causes, but only as a process of adjustment. 

If, as the outcome of all these analyses, the rent question 
should begin to seem one of interminable confusion, it only 
needs be pointed out that all attempts to explain value 
solely or mostly by examination of the supply term of the 
value equation, necessarily lead to this result. Approaching 
these questions from the point of view of demand, the difficul- 
ties vanish. Demand controls supply, and supply adjusts itself 
to demand as expressed in market values. Men adapt their 
productive energies to price conditions as the market has de- 
termined them, not with any hope of fixing prices (except in 
cases of monopoly), and never with any idea of determining 
price by cost of production. The problem is always to adjust 
cost of production to price, never price to cost of production. 
Changes in value modify supply, and changes of supply, 
resulting from changes in value, in turn modify value; but 
demand is the motive force behind supply, and expresses itself 
as motive force in terms of value. To explain production in 



102 OUTLINES OF ECONOMIC THEORY 

terms of the cost-of-production doctrine violates the facts or 
means nothing. To explain values under that formula is to 
emphasize the secondary to the exclusion of the primary factor. 
Value is a resultant from the forces of demand and supply, 
supply being itself a resultant from demand. Prices rise 
whenever demand tends to raise them, unless counteracting 
tendencies in the volume of supply are thereby set up. 

89. It follows that from other than the individual point of 
view, none of the forms of compensation attributed to produc- 
tive forces are to be regarded as primarily causal elements in 
market values, — but rather as distributive shares received by 
different cooperating factors out of the apportionment of the 
value product. Wages and interest, as well as rent, are com- 
pensation and not cost — result and not cause. 

It is true that were the wages lower in any industry, the 
product could and would be sold at a lower price, since the 
supply would be increased until lower prices of product would 
offset lower outlays in production. But this analysis is super- 
ficial, and carried only thus far makes for erroneous conclusions. 
It is easy to say what would happen if wages were lower ; but 
wages can be lower and remain lower only upon the condition 
that wages fall along the whole line of industry. Wages are 
results. What forces determine the level of wages in any 
given industry ? Why are they as they are ? Why not half 
as high or doubly high ? Evidently if they were higher, 
prices of products would have to be higher. Why may not 
this be ? If wages were ultimately a cause, almost anything 
might be, and the striking trades-unionist, the eight-hour agi- 
tator, and the protectionist would have foreclosed the argu- 
ment. But the production of each commodity means the 
displacement of some other. Wages in all industries fix the 
wages in each, since the market values of the products in each 
industry operate as a standing offer of employment at corre- 
sponding wages. Thus it follows that market values in all 
industries fix the wages in each. Wages in each industry 
must be svifficient to induce on the part of some labourers a 
refusal of the remunerations possible in other industries. 



EENT OF LAND 103 



90. This reasoning applies to interest equally with wages. 
The ultimate force is demand, and wages and interest are forms 
of compensation received in ministering to it. Likewise with 
rent. The extent of society's disposition to sac- Distributive 
ritice other goods in order to obtain agricul- shares are 
tural goods, determines the quality and kind ^^^^ ^' 
of productive energies which may be remuneratively applied 
to agriculture instead of to something else, and as well, also, 
the amount of rent which Avill be competitively paid to any 
landlord. If this demand is such as to render all land utilized 
for products rent-paying land, it is idle to ask whether this 
rent-payment is a part of price. The market demand consent- 
ing to pay, if necessary, a given price, cannot be satisfied with- 
out cultivating all this land. The poorest of the opportunities 
afforded obtain through the competition of cultivators a con- 
siderable rental and sale value. If there is an abundant 
supply of land, it is price which determines the point at which 
the marginal line is fixed. It is the same force acting in 
precisely a similar fashion which fixes the rent-payment where 
all land is rent-paying- land. So long as there is marginal land 
to be had for the taking, rent clearly enough does not add to 
price. Nor, in the second case, does rent increase the price, 
since by the very fact that the land is limited, the high price 
is unavoidable on any assumption, and the rent is therefore 
a mere question between owner and cultivator in the distribu- 
tion of a produced value, and is entirely without interest to con- 
sumers. Unquestionably, were there an unlimited supply of 
land, this rent would not be paid, and prices would be lower ; 
but mark, not lower because the rent is not paid, but lower 
because conditions exist which, in making a lower price pos- 
sible, make this rent impossible. And mark, also, that the 
poor land, when it crosses the marginal line into utilization, 
crosses as a result of market values, and only in a secondary 
and derivative way, by affecting supply, becomes a factor in the 
determination of value. Demand has carried prices iip, and 
the rise in prices has set in operation forces of supply tending 
in some measure to counteract the rise or to set a limit to it. 



104 OUTLINES OF ECONOMIC THEORY 

We conclude, then, that rent, like wages, profits, and inter- 
est, is primarily a share in the distribution of the social prod- 
uct, — an outworking of the competition of producers for the 
most favourable opportunities for production, — and that cost 
of production for agricultural, as Avell as for non-agricultural 
products, points merely to the compensation upon which is 
conditioned the displacement of other values. 

91. This seeming diversion from the subject of rent proper 
will have justified itself if it shall serve to bring out more 

clearly the necessity in economic reasoning of re- 
The point of garding man as the subject and central point in 

economic science ; his environment as his oppor- 
tunity; his industrial product as his remuneration ; his economic 
activity as his attempt to produce and distribute this product 
along the lines of least resistance (sacrifice). Normal price is 

to be conceived as the line of least resistance, not 

only for the sellers and buyers directly engaged, 
but also for the producers in other employments searching for 
those lines of activity affording the highest remunerations. 
Market prices are found to fluctuate in either direction about 
these normal or ideal prices, and cannot, in the competitive 
adjustment of sacrifice, long or widely depart therefrom. In 
short, the normal price is that price at which no producer can, 
to his own thinking, better employ himself in some other line 
of production. Prices generally would stand at their normal, 
if no producer or consumer could to his own thinking advanta- 
geously change his manner of economic action. But, like the 
ocean, market values have no rest. Prices ripple and wave 
above or below their ideal level, as desires and appetites, 
opportunities and abilities, slowly or rapidly change in force ; 
yet they are none the less tied to the level fixed by social de- 
mand, and confess the controlling power of this level as truly 
as do crest and trough their subjection to the ideal level of 
the sea. 

It remains to observe that an increase in population would 
not, necessarily, even with stationary arts of agriculture, com- 
pel an increased proportional application of productive energies 



KENT OF LAND 105 



20 20 


20 


20 


20 


20 


21 


21 


21 


21 


21 


21 


22 


22 


22 


22 


23 


23 


23 24 24 24 25 25 | 


25 


26 


26 


26 


26 


26 


27 


27 


27 


28 


28 


28 



to the land, provided tlie average consumption of agricultural 
products should diminish for any cause, or the direction of 
consumption should change to products of the soil more readily 
produced; as, for example, if corn should take the place of 
wheat for general use as food. 

Questions 

Assume an island with lands ranging in pro- 
ductive quality from 28 to 20 as by diagram. 
Consider that with each 100 of population, a new 
tract has to be cultivated, and that the diagram 
covers all the land to which the society has access. 
What will be the sum total of rent with a total 
population of 900 ? 1300 ? 1800 ? 2300 ? 2500 ? 
2900? 

What effect, other things being equal, does population have on total 
rent ? 

Improved machinery ? 

Improved fertilizers ? 

Better scientific knowledge of agriculture ? 

Improved transportation methods ? 

Answer these questions under two assumptions. 

First, that land is in large supply ; second, that all is in cultivation. 

Is price fixed by margin of cultivation, or margin by price ? Which is 
primary ? 

Trace analogy to a spring under pressure. 

What have producer's sacrifices to do with it? 

Which producers ? 

Explain how rent is not a part of price. 

Are wages and interest a part of price ? Why ? 

Why does a farmer abandon his land or change his crop ? 



CHAPTER VIII 
TENDENCIES OF POPULATION 

92. In economic discussion, there is a close connection, log- 
ical or illogical, between the doctrine of cost of production, 
Does cost of pro- ^^ ordinarily stated, and the tendencies of pop- 
duction apply ulation. If labour, instead of the product of 
to labour? labour, be held to be a thing of value, — a com- 

modity, — and if the normal market value of a commodity be 
held to depend upon its cost of production, it is a ready 
conclusion that the cost of labour — wages — cannot perma- 
nently stand above the cost of rearing and maintaining the 
labourers. This conclusion is, perhaps, not a necessary one; 
in fact, not all the writers who adopt the prevailing '' cost-of- 
production " notion apply it with equal emphasis and confidence 
to the wages question. 

The probable effect from large increases of population in 
the future can mostly be deduced from the law of diminishing 
returns. Rents would rise as cultivation was pushed to poorer 
soils — while wages would tend toward fall from two causes : 
first, this larger share of the landlord in the division ; second, 
the lower product per capita to be divided. But the fear that 
idleness, lack of employment for any part of the race, would 
follow from over-population is groundless. As long as needs 
and desires remained unsatisfied there would remain open to 
all producers a market for commodities upon advantageous 
terms of exchange. Not as sellers, but as producers in an 
increasingly unfavourable environment, would humanity suffer. 

For the purpose then of making these, principles of practical 
application to the economic outlook, we are interested to ex- 
amine into the tendencies of population as actually mani- 
fested. This investigation is perhaps not strictly a matter of 

106 



TENDENCIES OF POPULATION 107 

economic theory, but belongs rather within the province of 
biology or sociology. 

The theoretical aspects of the population question are not 
entirely covered by the law of diminishing returns. We have 
also to deal with the law of increasing returns. Great prog- 
ress in the methods of the extractive industries 
seems probable. It would be hazardous to as- I^ o^er-popuia- 

^ _ tion imminent ? 

sert that during any given period, even with 
a very rapid increase in population, the industrial advance 
may not be sufficient to overcome the tendencies indicated 
under the law of diminishing returns. But, to our present 
knowledge, it seems probable that at some point this ten- 
dency to diminishing returns must assert itself in the bal- 
ance; that population cannot endlessly multiply without at 
some point meeting with resistance in lessened supplies of 
food products and of the raw materials of industry. It is 
conceivable enough that the arts and processes of manufacture 
may advance ; that a constantly greater proportion of the pro- 
ductive energies of society may be applicable to the extractive 
industries ; that by this method the elastic limit of want may for 
a long time be extended. But, if population is to be assumed 
to increase continually, the harsh pressure of this limit seems 
idtimately certain. That time, if it comes, will illustrate the 
iron law of wages ; when the remunerations of labour will be 
just sufficient to maintain the supply of labourers ; when inev- 
itable death will counteract all excess of births ; when, in Mal- 
thus' vigorous metaphor, the covers laid at Nature's banquet 
will be found insufficient for the invited guests. 

93. But, assuming that the remunerations of labour may 
at some time become so meagre as to inaugurate a veritable 
struggle for existence and to negative further Howthemargi- 
expansion of population, it by no means follows nai doctrine 
that the remunerations of all participants in the ^^^ ^^^' 
struggle will stand at the margin of subsistence ; it merely 
follows that there will be effectively a margin of subsistence, 
and that population will be held in check by the death of those 
members not able to attain to this margin, — and that differen- 



108 



OUTLINES OF ECONOMIC THEORY 



tial advantages measured tlierefrom will accrue to all members 
other than the marginal labourer. While weaklings die, the 
strong may prosper. In truth, the ominous quality of this 
alleged population law has been greatly exaggerated. It 
points not to an average rate of wages for all labourers, 
but to a death-line minimum for many. Nor is this assumed 
condition so far wide of the present condition as may be 
imagined. Even now, yearly, many human beings die of 
want, in its varied relations with idleness, vice, and disease. 
But the Malthusian forecast points to a time when nothing 
but a diminishing birth-rate can avoid for many a threatened 
extinction. At present such inevitableness as exists is of 
inner rather than of outer conditions. 

94. It must be remembered that whatever Malthus' disciples 
have since done, Malthus himself did not assert that over- 
population is the unavoidable fate of the race, but rather that 
it is a danger against which only a conscious and continuous 
resistance can offer a remedy, and toward which he believed that 
the Poor-Law system of England exercised a strong influence. 

The evidence in support of the Malthusian foreboding is 
very considerable. During the past two hun- 
dred years, at least, population has increased evi^g^ggv^ 
over the civilized world with startling rapidity. 
This will be seen from the following table : — 



Countries. 


Population in the Tears. 


1789 


1882 


1889 


France 

England 

Germany 

Russia 

United States .... 


Million 
26 
12 
24 
25 
3 


Million 
37 
36 
45 
90 
52 


Million 

38 

38 

48 
100 

62 


Totals 


90 


260 


286 



So far as our knowledge goes we are justified in believing 
that the tendency to increase has been general throughout 



TENDENCIES OF POPULATION 



109 



history. Observation of lower forms of life discloses this 
tendency toward increase to the outside limit permitted by 
the means of subsistence. An unquestionable increase in 
marriages and births accompanies periods of prosperous busi- 
ness ; to at least a large proportion of human beings, the num- 
ber of children raised is limited only by the number that can 
be cared for ; and in newly and thickly settled countries, 
where the necessaries of life are comparatively abundant, the 
tendency to increase is especially marked. 

95. The present tendencies of European populations will be 
examined in detail. 

It is computed that in the average of European peoples, 
the child-bearing age of women covers about twenty -two years, 
and that in each one thousand of population there 
are approximately 167 child-bearing women ; and ^^^ encies in 
that a birth-rate of twenty children per year 
among each thousand of population would be ordinarily suffi- 
cient to maintain a population at a stationary figure. As the 
annual percentage of births increases, the percentage of mor- 
tality increases also — other things being equal — because of 
the especially high rate of mortality among young children. 

The following table gives, for the years from 1878 to 1887, 
the average birth- and death-rates of European peoples, and 
their respective periods of doubling at these rates : — 



Countries. 


Birth-rate per 
Ttiousand. 


Death-rate per 
Thousand. 


Doubling 
Period. 


France 

Switzerland 

Sweden 

Norway 

Great Britain and Ireland . 

Belgium 

Germany (1881-1887) . . 

Austria 

Saxony 

Hungary 

Italy 


24.4 

29.7 

30.1 

30.9 

31.5 

31.7 

38.46 

39.06 

43.08 

45.4 

38.2 


22.2 

22.5 

17.9 

15.9 

19.2 

21.9 

26.82 

30.57 

30.4 

34.9 

29.2 


445.5 years 
135 " 

82 

67 

81 
102 

85.9 " 

80.7 " 

75 

85 " 
111 



no 



OUTLINES OF ECONOMIC THEORY 



The following tables will show, for several of these countries, 
the tendencies of births and deaths for a period preceding 
1886 : — 



Countries. 



Year. 



Eate of Births 
per Thousand. 



Eate of Deaths 
per Thousand. 



Belgium 



Sweden 



Italy 



Great Britain and Ireland 



Germany 



Saxony 



Norway 



1865 
1875 
1885 

1865 
1875 

1886 

1872-76 

1877-81 
1882-86 

1865 
1875 
1885 

1841-50 
1851-60 
1861-70 
1871-80 
1881-85 

1865 
1875 

1885 

1865 
1875 
1885 



31.4 
32.5 
31.7 

26.2 
31.0 
30.5 

37.13 
36.32 
37.31 

30.7 
31.2 
31.0 

37.8 
36.8 
38.7 
40.7 
38.5 

42.9 
45.7 
43.6 

31.7 
30.6 
30.8 



24.5 

22.7 
21.8 

19.2 
30.3 
17.4 

32.06 
28.87 
27.31 

20.7 
21.6 
18.8 

28.2 
27.8 
28.4 
28.7 
27.2 

31.9 
32.0 
30.3 

16.5 
18.7 
16. 



It will be seen that of this list all the countries named, 
excepting Norway, show an increased birth-rate, and all, with- 
out exception, a decreased death-rate, and that Norway is the 



TENDENCIES OF POPULATION 



111 



only one of these countries which does not indicate a general 
tendency toward a more rapid increase in population. These 
facts are perhaps to be attributed to rapid commercial and 
industrial development, to increased facility for obtaining food 
supplies through importation, and to a general advance in the 
knowledge and practice of hygiene. 

96. On the other hand, analysis of population tendencies in 
England, France, and the United States during the last one 
hundred years, reduces somewhat the overwhelming force of 
the above figures. In fact, the past one hundred years dis- 
close a marked tendency in France toward a stationary condi- 
tion of population ; even, perhaps, toward a decrease. In the 
absence of immigration and of the relatively large birth-rate 
among immigrants and their immediate descendants, it is clear 
that French population would be, at present, diminishing. 
French emigration is so small as to be a neglectable factor : — 



Year. 


Kate of Births per 
Thousand. 


Rate of Deaths per 
Thousand. 


Increase. 


France — 








1801-10 . . . 


32.3 






1811-20 








31.6 


25.9 


5.7 


1821-30 








30.8 


25.0 


5.8 


1831-40 








29.0 


24.8 


5.2 


1841-50 








27.4 


23.3 


4.1 


1851-60 








26.3 


23.9 


2.4 


1861-70 








26.3 


23.6 


2.7 


1871-80 








25.4 


23.7 


1.7 (war) 


1881 . 








24.88 


22.0 


2.88 


1882 . 








24.88 


22.2 


2.68 


1883 . 








24.81 


22.2 


2.61 


1884 . 








24.75 


22.6 


2.15 


1885 . 








24.34 


22.1 


2.24 


1886 . 








23.71 


22.3 


1.41 


1887 . 








23.47 


22.0 


1.47 



112 



OUTLINES OF ECONOMIC THEORY 



The following are the figures for Great Britain : 



Years. 


England. 
Per Cent of Increase. 


Scotland. 
Per Cent of Increase. 


Wales. 
Per Cent of Increase. 


1821-31 .... 


16. 


13.0 


12.2 


1831-41 . . 






14.6 


11.8 


13.2 


1841-51 . . 






12.8 


10.2 


10.3 


1851-61 . . 






12.0 


6.0 


10.5 


1861-71 . . 






13.4 


9.7 


9.5 


1871-81 . . 






14.5 


11.2 


11.8 


1881-91 . . 






11.7 


8.0 


11.6 



In England and America, the most noticeable decrease in 
the birth-rate has manifested itself in the last ten or twenty 
years. This decrease is especially marked among the well-to- 
do classes, and seems especially characteristic of the cities. 
The immigrant populations of the United States are by far 
the most prolific of children. The following table contains 
data for the United States during the last one hundred years. 
It is generally admitted that the census of 1870 is untrust- 
worthy. (The asterisk denotes an estimate.) 



3 




a 

3 


to 


3 

9 oJ 


C 

3 

o 


m O 
9 rt 
g 3) 




a 




c 


? 


S-o 


<<-( 


c g 


Ct-. 
















O 


o 


03 - 


"S » 


*— ' OJ 




.^ •— * 






03 


«i 


S-g 


«« 


'^ S 


a o 


C g 




3 






3 bo 


6 $ 


o 2 


'^ s 


c3 






a« 




S 3 


oj"^ 


^£ 


P 


P.4 


H 




^ 


Ch 


P.^ 


Ch 


1890 


*62,032,672 


11,876,889 


5,245,530 


6,631, -359 


23.68 


10.45 


13.28 


1880 


50,155,783 


11,597,412 


2,812,191 


8,785,221 


30.07 


7.29 


22.78 


1870 


38,558,371 


7,115,050 


2,433,524 


4,833,908 


22.63 


7.74 


14.89 


1860 


31,443,321 


8,251,445 


2,579,590 


5,611,889 


35.58 


11.12 


24.46 


1850 


23,191,876 


6,122.423 


1,753,251 


4,469,148 


35.87 


10.27 


25.60 


1840 


17,069,453 


4,203,433 


599.125 


3,604,308 


32.67 


4.65 


28.02 


1830 


12,866,020 


3,232,198 


143,439 


3,088,759 


33.55 


1.49 


32.06 


1820 


9,633,822 


2,393,941 


*11S,385 


2,303,941 


33.07 


*1.64 


31.43 


1810 


7,239,881 


1,931,398 


*70,000 


1,851,398 


36.38 


*1.32 


35.06 


1800 


5,308,483 


1,379.269 


*70,000 


1,299,269 


35.10 


*1.78 


33.32 


1790 


3,929,214 















TENDENCIES OF POPULATION 113 



Parallel facts are obtainable from France in greater detail ; 
the most wealthy departments show relatively the lowest birth- 
rates ; the most wealthy quarters of Paris relatively lower 
birth-rates than the less wealthy and poor quarters. The 
number of births in France entire in the years 1841-45 was 
976,000 per annum ; in 1888 the total was 882,639. 

97. It is not easy to deduce a law from these facts. We ob- 
serve, however, that the three countries in which a pronounced 
tendency toward a decreased birth-rate has de- 
veloped, are precisely the three countries in popjiatjo^m^w ? 
which are the greatest development in wealth 
and industry and the highest well-being ; that the tendency 
manifests itself most strongly among the classes of greatest 
financial prosperity ; and that improvidence and recklessness 
in child-bearing are especially characteristic of that class of 
people most inclined to improvidence and recklessness in 
everything else. But over against these reasonings stand a 
multitude of figures making toward a seemingly contrary con- 
clusion. If any reconciliation is possible, it will hardly leave 
the field free to Malthusianism or to its opponents. It is at 
any rate not incredible that the first effect of easier conditions 
of existence is to stimulate population, and that the final effect, 
for peoples of the European grade of civilization, is in the other 
direction. But that which may stand for a law for one nation, 
or for one stage of civilization, may be entirely inadequate 
for other nations or conditions. The question is intimately 
connected with the standard of living (or comfort), and its 
possible variations among different peoples and in different 
circumstances. It does not necessarily follow that because the 
labourer obtains larger remunerations, he will therefore raise 
more children ; he may apply his larger income to better nour- 
ishing himself and the family already dependent upon him ; 
his larger wages may be a source of increased ability to earn 
yet larger wages ; he may devote his increased wages to vicious 
indulgences, or he may hold to his previous scale and manner 
of expense, taking to himself greater leisure, or providing 
more adequately for the future of himself or his family. It 



114 OUTLINES OF ECONOMIC THEORY 

seems probable that easier conditions of life, to the very- 
vicious or very improvident, will result in increased vice and 
improvidence, sexual and other. 

98. To a hard-working and ill-fed population of the Euro- 
pean type, a considerable proportion of any increase in remu- 
nerations will probably go to increased nourishment, increased 
intelligence, and increased reproductiveness. Increased remu- 
nerations to the point of luxury (an indefinite term) may re- 
sult in increase of leisure or increase in positive satisfactions, 
and may be followed finally by a higher standard of living, or 
by an increase in population, or by both, or even by a decrease. 
I quote from Lord Brassey's Work and Wages, Chap. III. : 
'•'At the commencement of the construction of the North 
Devon Railway, the wages of the labourers were 2s. a day. 
During the progress of the work their wages were raised to 
2s. 6d. and 3s. a day. Nevertheless, it was found that the 
work was executed more cheaply when the men Avere earning 
the higher rate of wages than when they were paid at the 
lower rate. Again, in London, in carrying out a part of the 
Metropolitan Drainage Works in Oxford Street, the wages of 
the bricklayers were gradually raised from 6s. to 10s. a day ; 
yet it was found that the brickwork was constructed at a 
cheaper rate per cubic yard, after the wages of the workmen 
had been raised to 10s., than when they were paid at the rate 
of 6s. a day. 

" On the railways of India it has been found that the great 
increase of pay which has taken place has neither augmented 
the rapidity of execution, nor added to the comfort of the 
labourer. The Hindoo workman knows no other want than 
his daily portion of rice ; and the torrid climate renders Avater- 
tight habitations and ample clothing alike unnecessary. The 
labourer therefore desists from work as soon as he has pro- 
vided for the necessities of the day. Higher pay adds noth- 
ing to his comforts — it serves but to diminish his ordinary 
industry." 

99. The laws of population, when once discovered, will be 
of enormous importance to almost all practical applications 



TENDENCIES OF POPULATION 115 

of Political Economy. There is hardly any economic question 
that is not, from some point of view, a population question. 
We have seen the closeness of the relation to 
rent and wages. There is an equally impor- ^"^^^^^^^^^ 
tant connection with the different methods of 
charity administration ; and it is possible that socialism may 
finally stand or fall with the outcome of investigations along 
this line. In these investigations the services of Malthus and 
his disciples have been of great importance, however question- 
able for theoretical purposes may have been their conclusions. 
So much cannot be said for the practical applications of their 
teachings. If it be true that in any country there is danger 
of over-population, it is reasonably certain that the classes of 
society with whom the danger mostly lies will neither hear 
nor heed Malthus' teaching ; that the only people with whom 
the teaching will at all avail are the very people who least 
ought to heed it, and who are already too prone to make large 
practical applications thereof. Not only this, but the question 
is more than a national question, — it is a race question. The 
western races bear to the rest of the world a similar relation 
to that borne by the better classes of society to the poorer 
classes ; if the western races do not people the world, the 
other races will. (See Sections 252-258.) 

Suggestive Questions 

What bearing has the population question on rent ? 

On wages ? 

On charity administration ? 

On public expenditures for general education and culture ? 

Explain the law of the survival of the fittest as it applies to the lower 
orders of life. 

Why does it not apply in equal degree to humanity in the complex 
conditions of human society ? 

Do we let it apply ? 

Easier conditions of life among lower orders result in a larger maturing 
of offspring : does there result from easier conditions any change in birth- 
rate ? 

How with humanity as to maturing of offspring ? 



116 OUTLINES OF ECONOMIC THEORY 

How as to birth-rate ? 

Do the poorer classes show higher or lower birtli-rate than the rich or 
well-to-do ? 

Have lower orders of life any standard of comfort similar to that 
among men ? 

Do their standards change ? Do ours ? 

If society refuses to care for poverty, disease, and vice, will there be 
any effect upon the birth-rate ? Will it rise or fall ? 

Will there be an appreciable effect upon the percentage which mature ? 
What will be the effect upon the quality of those who mature ? 

Asa general question, is it better to abandon the disease and vice in 
the hope that it will perish without offspring, or to attempt to cure in the 
conviction that multiplication will take i^lace anyway ? 

What have population tendencies to do with socialism ? 

What is the probable future of Russia as an international power ? Of 
China ? Of France ? Of the English race ? 

What bearing do you perceive upon the question of immigration ? Of 
public schools ? 

What did Henry Ward Beecher mean when he called the public school 
the national stomach ? 

Suppose a given ancestral pair to bring up two children, these chil- 
dren in turn each two children, and that there are no intermarriages 
among these descendants. In ten generations how many people can 
count this original pair as among their ancestors ? 

Had there never been any intermarriages among your ancestors, how 
many strains of ancestry would meet in you, reckoning back thirty 
generations ? 

Without allowing for intermarriages or immigration, how many gen- 
erations must we reckon back to find a common ancestry for all of us, 
supposing an ancestral stock of 50,000,000 ? 

Suppose a village containing 100 families, — entirely unrelated by blood, 
the rate of production two to each family, — and no marriages made with 
outsiders. In how many generations will marriage become impossible 
for all, unless relatives intermarry ? 

Assuming a nation of 70,000,000 people, — no immigration or outside 
marriages, the rate of production as before, — in how many generations 
will intermarriage between descendants of the same stock become un- 
avoidable ? 

How long will it be in the widening circles of intermarriage before 
your descendants will be as much interested as mine, — intermarriage 
among relatives aside, — in the question of how I have lived ? 

In view of our genealogical histories, which are the harder to explain, 
the similarities or the differences in people of the same nation ? 



TENDENCIES OF POPULATION 117 

Do we probably greatly differ other than to the extent that education 
and environment have in one, two, or three generations developed latent 
powers ? 

What has this to do with charity administration ? 



NOTES 

Many years ago I stated it as my opinion, and gave my reasons, that 
the population of England and Wales, from the beginning of recorded 
economical history to the end of the sixteenth century, was never in 
excess of two and a half millions, and was often less. At the end of the 
seventeenth century it was from five to five and a half millions. 

— Rogers, Ec. Int. of Hist., p. 157. 

Population instead of increasing decreases slowly in Normandy, and 
this since about thirty years. Never, however, has industry there iaeen 
so flourishing, never agriculture so productive ; never the fields so rich, 
or the inhabitants in enjoyment of as high a degree of comfort; never, 
likewise, have the wages of workmen employed in farm labour attained 
so high a point ; they have increased by two-fifths. . . . Whence comes, 
then, this decrease in population ? It is not the effect of immigration, 
for the Normans are so well off at home as not to go abroad in search of 
the means of subsistence which at home they find abundantly. It is the 
effect of a lower fertility from marriages in the rural districts, and solely 
in the rural districts. . . . The same thing is true in some other parts of 
France, and as well in some other of the countries of Europe. Increasing 
wealth brings about, — I will not say purposed continence, — but the fear 
of having too many children, and families become smaller and smaller in 
number. This is what is taking place in Switzerland, for example, in 
several of the Cantons where the rural people enjoy real and well-assured 
well-being. 

— Joseph Garnier (France), translated from Du Principe de Popu- 
lation, 2d ed., p. 347. 

Whatever be the fashion or desire which is first developed in the mind 
of any community, it makes a demand upon the existing body of goods, 
or upon the current production of wealth, which at once antagonizes the 
strong and urgent disposition to the consumption of wealth in the support 
of an increasing population. The newly awakened passion or desire can- 
not be gratified out of the existing fund of wealth, unless the procreative 
force receive a check. Whether this shall be done or not is a question, 



118 OUTLINES OF ECONOMIC THEORY 

upon the answer to which depends the whole economic future of the com- 
munity. . . . Since the procreative force increases rather than dimin- 
ishes in case of poverty and squalor, there is no natural resting-place for 
population, if once it passes below the plane of ample subsistence, until 
it reaches the point where it meets the positive checks of famine and 
disease, and, it may be added, of war. 

— Walker, Advanced Course, sec. 397. 

It is impossible that a positive check so goading and remorseless as 
famine should prevail without bringing in her train all the others ; pesti- 
lence is her uniform companion, and murder and war are her followers. 

— N. W. Senior (England). 

The population under ten years of age in 1880 (in America) was 26.7 
per cent. In 1890, 24.3 per cent. Now what does this mean ? It means 
that if the population of 1880 had been maintained in 1890, the population 
of the country would have been greater by sixteen or seventeen hundred 
thousand, and the aggregate population over 64,000,000. This would have 
been equal to the most liberal estimates of our population, and the fact 
that the actual enumerated population did not equal the estimate can be 
explained entirely by the falling off in the birth-rate during the previous 
ten years. . . . Again, the falling off in the birth-rate finds corrobora- 
tion in the returns, showing the falling off in the size of families from 
5.9 in 1870 to 4.9 in 1890. . . . Elkanah Watson in 1815 estimated ,the 
population of the United States for each decade until 1900. In 1820 he 
was only about 8000 out of the way ; in 1830 about 32,000 ; in 1840 about 
the same neighbourhood ; in 1850 something like 630,000 ; and in 1860 
over 310,000. Then he took a mighty fall, and was millions too much in 
1870 and 1880, closing nearly 15,000,000 too high in 1890, while his esti- 
mate for 1900 of 100,235,985 will probably exceed the actual amount by 
25,000,000. 

— Robert Porter, Supt. of Census, 1890, Article in Chicago Inter- 
Ocean, Sept. 11, 1894. 



CHAPTER IX 
CAPITAL 

100. The ambiguities in the term " capital " are nearly- 
parallel to those examined under the head of wealth. They 
arise from insufficient attention to the distinction between the 
things internal to man and those external, or from confusions 
due to changes in point of view. 

If one man works a year in making a machine, and another 
a year in learning his trade, it seems clear that each is bend- 
ing his energies towards the future with a purely 
commercial motive, and it is not at first thought ^re th^e mtei- 

' _ ^ lectual capitals ? 

easy to grasp the necessity of different classifi- 
cations for the two cases. The term "intellectual capital" 
has been invented to distinguish mental acquisitions from 
acquisitions of what may properly be termed wealth. Prob- 
ably no great harm results from the use of this term ; and yet 
if there are intellectual capitals, there ought also, logically, to 
be capitals of morals, health, and beauty. Again, capital is 
logically a classification inside wealth. These intellectual 
acquirements are not wealth, but preparation for the creation 
of wealth. It cuts across established classifications to make 
them wealth ; and finally, and as it seems conclusively, it de- 
stroys all line of distinction between possessions and possessor 
— capital and capitalist. The question is, however, mostly one 
of definition. Admittedly, the analogies are strong in some 
respects between intellectual acquirements and capital. 

Restricting the meaning of the term " capi- individual and 
tal " to external utilities, there yet remains a social point of 
deal of perplexity, resulting mostly from insuf- '^^^'^• 
ficient recognition of the fact that capital means different 

119 



120 OUTLINES OF ECONOMIC THEORY 

tilings accordingly as it is considered from tlie individual or 
the social point of view. 

Adam Smith defined capital as that part of a person's stock 
from which he expects to derive an income. This answers 
fairly well to the meaning of the word as used by business 
men. This concept includes, for example, lands, food on hand 
for labourers, deposit accounts with banks, patents, and goodwill 
in business. 

The other concept is almost entirely unfamiliar to the busi- 
ness man, but is most important for purposes of economic 
theory. It proceeds from the point of view of society instead 
of the individual. It conceives capital as (a) an article of 
wealth, (6) the product of human labour, (c) used as a means 
of further production of wealth (utility). 

From the individual point of view, all that is capital which 
is intended to minister to the increase of individual wealth. 
From the social point of view, all that is capital which, having 
been derived from labour, cooperates with labour in increasing 
social wealth. 

Social capital, then, includes tools, machines, factories, raw 
materials, coin, etc., and, in general, all social wealth which is 
not consumption wealth. Private capital includes all these, 
and, in addition, all "consumption goods Avhich the owners 
do not require for themselves but employ by exchange (sale, 
hire, loan) in the acquisition of other goods " (Boehm-Bawerk) ; 
e.g. real estate, legal claims, means of subsistence to be 
supplied to labourers. 

101. Even this line of distinction is hard to apply in par- 
ticular cases. The intention with which wealth is held deter- 
mines whether it is capital or not. Thus, v^ith 
someambigui- changing purposes and varying uses, any par- 
ticular form of property may pass out from the 
lists of capital or back again. The physician's horses serve 
now as capital, and again, when he drives for pleasure, as mere 
consumers' goods. The actress's gowns are in one case mere 
raiment ; in another, stage costume ; in a third, business ad- 
vertising. A considerable part of the living expenses of the 



CAPITAL 121 

foreign ambassador are mere incidents of his official posi- 
tion. 

Again, the utility of any commodity is partly dependent on 
questions of place and time. Soda from the plains, coal from 
the mines, wood from the forest, gain in utility' by mere trans- 
portation. Ice preserved from winter to summer acquires all 
its utility from mere lapse of time. ISTo one would question 
that when cider is stored to await the change to vinegar, the 
cider is capital, and the change to vinegar the production of 
utility. It is difficult to regard the ice in any other light. 
As has already been pointed out, the merchant is a producer 
in the sense that from the physical, as well as the legal point 
of view, he is engaged in the transportation of goods. Ware- 
house and cold-storage men produce both time and place utili- 
ties. Goods in a merchant's stock in trade fall, then, within 
the category of capital rather than within that of consumers' 
goods. They are not mere wealth until they have passed the 
last process of manipulation and are truly ready for consump- 
tion. This last is more than a question of nomenclature ; 
it is ultimately the social justification for the existence of 
middle-men. 



CAPITAL AND ITS CREATION 

(Sections 102 to 108, inclusive, may be omitted in class work.) 

102. Under the present industrial organization, some com- 
mon commodity of exchange and measure of value is essential 
to the transaction of business. Audit is evident that the com- 
modity or commodities selected and used for this purpose 
must be held to serve a function as important to the creation 
of utilities as that of any other of the tools of industry. Cur- 
rency is one of the most effective of labour-saving contrivances. 
The bullion utilized for this purpose is not only wealth, but it 
is wealth at a high degree of productiveness. 

103. But what, for purposes of classification, shall be said 



122 OUTLINES OF ECONOMIC THEORY 

of fiat legal tenders, of bank-notes, cheeks, bankers' credits, 
and generally of the whole body of credit and fiat substitutes 
for coinage currency. From the point of view of the individ- 
ual, they are undoubtedly proper items in an inventory of 
riches. From the point of view of society as a whole, and re- 
garded as matter of debt and credit, they would seem to be 
clearly subject to the cancellation process previously outlined. 
Yet, while uncancelled, they serve the purpose, however im- 
is paper money perfectly, of a medium of exchange, and dispense 
either wealth or with the use for that purpose of large amounts of 
capital? wealth. If coinage currency is a labour-saving 

device, credit currency is a bullion-saving device. Considered 
as a created or saved utility, credit currency may with some 
force be claimed to be a form of social wealth. But the objec- 
tion is a forcible one, that knowledge and experience are also 
effective for the saving of labour and wealth, and are yet not 
wealth — whatever other or better thing they may be held to 
be ; and that if a method in affairs were devised for dispensing 
altogether with currency of any sort, no room would remain for 
asserting that an increase of wealth had taken place. 

It appears to be true that, for purposes of classification, no 
better ground exists for regarding circulating credit as social 
wealth than for so classing the institution of exchange, the 
form of government, or the grand total of virtue, experience, 
and intelligence, which are the heritage of the race. 

But if circulating credit cannot be held to be wealth, some- 
thing remains to be said of the material paper, the ticket, so 
to speak, which circulates as currency. If the credit right 
is not wealth, or its circulating characteristic wealth, it seems 
at least true that a new and remarkable utility has been dis- 
covered in paper utilized for currency purposes ; and in this 
sense it may be correct to claim that paper currency is social 
wealth. 

104. Whether one shall regard the foregoing conclusion as 
reasonable or fanciful is not of particular interest to a correct 
understanding of currency questions. But to measure correctly 
the great function performed by credit currency in the affairs 



CAPITAL 123 

of the commercial world is important. In the business of 
Great Britain and London, which is, in a considerable measure, 
the business of the world, the proportion of metallic currency 
to bankers' deposits is something like one to seven (Palgrave's 
Notes on Banking). Notwithstanding the fact that not only 
the business of one of the most wealthy, and industrially 
most energetic of nations is transacted in England, but that a 
considerable proportion of the world's business also is transacted 
there, the legal tender currency of Great Britain is noticeably 
less in amount, per unit of population, than among any other 
of the great industrial peoples. And the explanation of the fact 
is found not in an exceptionally great expansion of the credit 
system generally, but in a comparatively great extension and 
centralization of the deposit banking system. Doubtless, so 
far as promissory notes, bills of exchange, stocks, bonds, and 
book accounts are the subject of transfer from owner to owner 
in payment of indebtedness, they serve pro tanto to supply the 
need for currency. But it is the bank check and clearing- 
house in England which supply the greater part of the credit 
currency for exchange purposes. 

I quote from Sidgwick's Principles : " It is undeniable that, 
in England now, wealth is chiefly transferred by the interven- 
tion of a medium of exchange complex in com- -^^^-^ ^ ^^^ 
position ; consisting partly of gold coin, partly credit serve as 
of bank-notes, but to a greater extent of bank- ^^^^^^^y- 
ers' obligations to pay coin on demand, not represented by 
notes ; and it is chiefly this medium that is actually lent and 
borrowed in commercial and industrial loan transactions. And 
it is no less undeniable that the immaterial part of this instru- 
ment has functions precisely similar to those of the material 
portion ; that it is as effective in purchasing goods ; that bor- 
rowers pay the same interest or discount for the use of it ; and 
that it, no less than metallic or paper money, is, in ordinary 
times, currently accepted in final settlement of all debts, — 
except, of course, the debts of bankers. The essential and 
fundamental function of money is to be used in exchange and 
in other transfers of wealth, where the object is to transfer not 



124 OUTLINES OF ECONOMIC THEORY 

some particular commodity, but command over commodities 
generally ; it is as a medium of wealth-transfer that money is 
qualified for performing its other important function of meas- 
uring values. If, then, we take this function as essential ; if 
we understand by money that which passes freely from owner 
to owner, throughout the community, in final discharge of debts 
and full payment for commodities, then, in all ordinary con- 
ditions of modern commercial societies, bankers' debts payable 
on demand, however acknowledged and transferred, are as 
rightly called money as they are commonly so designated ; and 
in all consideration of the quantity of money available for com- 
mercial or other purposes, this fact ought to be recognized. 

" This leads me to notice an objection that is likely to be 

brought against the view above expounded. It may be said 

that what I have called Money is merely a part 

Credit one form ^£ what other economists have called Credit ; and 

of currency. ' 

that it is more convenient to keep this term as 
indicating its real quality. And I should quite admit that for 
some purposes it is important to insist on the fact that bank- 
ers' debts are after all debts, no less than those of private indi- 
viduals. But in a general consideration of the manner in Avhich 
functions of money are performed, it seems to me more impor- 
tant to point out that there is as much difference between one 
kind of credit and another, in respect of its currency, as there 
is between gold and ' goods.' If a private individual (A-), ob- 
tains any valuable article from another (B.), by promising to 
pay for it hereafter, and does pay for it, the credit he receives 
obviously does not operate as a substitute for money at all in 
the long run [unless the items of an open account offset each 
other], though it tends, pro tanto, to raise prices temporarily. 
Only if B. uses A.'s debt to him as a means of purchasing an- 
other commodity from C, does this credit begin to be a substi- 
tute for money. If C. uses it similarly in a similar transaction 
with D., its efiiciency as a substitute is doubled. But it is not 
until such a debt has come to be taken without any idea of 
using it otherwise than as a means of payment that it has 
completely acquired the characteristics of money. That this 



CAPITAL 125 

is in ordinary times the case with bankers' obligations taken in 
the aggregate is undeniable ; though (as I have said) the fact 
is obscured by the continual liquidation in gold of a small 
portion of such obligations." (Principles, Book II., c. 4.) 

105. The foregoing discussion of currency, otherwise outside 
our immediate purpose, has been introduced as essential to a 
correct understanding of the relations between savings, loan 
capital (loan funds), industrial capital, and the process of cap- 
italization. Speaking generally, and excepting from consider- 
ation the bounties of nature and the increase in values which 
flows directly from progressive development of human tastes, 
needs, and desires, it may be said that all wealth results from 
human activity, and is a surplus of production over consump- 
tion. Of the entire volume of wealth existing at any time, 
one portion is destined to consumption — to the direct satis- 
faction of human needs and desires ; another portion is des- 
tined to use in the reproduction of wealth. It is to the second 
portion that the term " capital " is applied. That is to say, cap- 
ital is wealth, other than nature and natural forces, used as an 
aid to human energy in the reproduction of wealth. It is to 
be noted that this definition conceives capital from the social 
instead of the individual point of view. So far as concerns 
questions of production and reproduction of wealth, nature 
and natural forces are to be regarded as forms of capital. 
For this purpose the only important distinction is between 
" consumers' wealth " and " producers' wealth." The question 
of origin is immaterial. 

106. It is, however, particularly to the manner in which 
savings become capital that attention is directed. Were the 
industrial organization of the socialistic type, the process of 
saving would be a matter, for theoretical purposes, of extreme 
simplicity ; a certain percentage of the social product would 
be withdrawn from the reach of consumers, or a certain per- 
centage of the social energies would be directed to the crea- 
tion of aids to future production, — the labourers so directed 
subsisting meanwhile upon the current product of industry 
or upon stored-up products. The date and manner of the sav- 



126 OUTLINES OF ECONOMIC THEORY 

ing would be for social purposes clearly open to analysis. In 
the first case, the saving would take place at the time at which, 
but for the withdrawal, consumption would occur. In the sec- 
ond case, the saving would date from the time when the aids 
for future production — the capital — were created ; that is to 
say, the time at which the products consumed were rendered 
into equivalent capital. 

In the existing industrial system, however, there is no such 
thing as a parallel withdrawal of commodities from consump- 

„ . ,^ . tion. The saving which one member of society 

Savings result m . . . -^ 

loan funds - not makes ill his daily or yearly consumption is not 
directly or neces- ^j^ q]i certain to be a social saving. In the aver- 

sarily in capital. . . 

age case he has secured a certain income, and 
has refrained, in some measure, from making purchases in the 
market. The aggregate social consumption is not less because 
of this abstinence ; the other purchasers have simply profited 
by this diminution of demand. When the labourer concludes 
• — - as an equivalent of past abstinence — to consume in excess 
of his current production, other purchasers will suffer by the 
resulting extension of demand. In short, individual absti- 
nence, in the present industrial organization, is a condition 
precedent to social saving, and therefore to possible capitaliza- 
tion of wealth ; but it is not social saving, nor is it capitaliza- 
tion. The labourer in the above case has saved himself a 
right to direct in purpose and manner a future application of 
Avealth or activity. It is upon his decision that capitalization 
will depend. It is of course true that the labourer may 
have followed a manner of creating capital as simple as the 
socialistic method. He may have reduced his production for 
purposes of immediate use, perhaps lessening his current con- 
sumption, perhaps subsisting on products of past labour, and 
have applied his energies directly to the production of capital ; 
as does oftentimes the farmer, for example, in digging a ditch 
or building a stone wall. That is to say, capitalization is pos- 
sible without an appeal to the loan market. Nor is it an easy 
matter to estimate the relative importance of this simpler type 
of capitalization. At all events, it calls for no especial labour 



CAPITAL 127 

of analysis, and is for the most part unrelated, to the phenom- 
ena indicated under the terms '' capital " and " interest." 

107. But, in the typical case of an appeal to the loan mar- 
ket for so-called capital, there is usually neither capital nor 
social wealth in existence, which in itself, or in equivalent 
existences, owes its origin to the savings now represented in 
the form of loanable funds. There exist against society in 
the form of hoarded money, or against banks in the form of 
bank-notes, deposits, and savings-accounts, or against individ- 
uals in the form of different species of claims, rights of direc- 
tion over the application of labour and commodities. Every 
credit represents such a right. The loan market consists of 
these rights and of nothing else. It is not be- -^jj jg England 
cause of her store in hand of iron or wood or so rich in so- 
provisions that England is able to supply the so- '^^ ^ '^^^^ ^ 
called capital for endless railroad building ; and the construction 
of railroads in America or Africa by means of English capital 
does not ordinarily mean the transportation from England of 
any considerable amount of commodities for this purpose. Nor, 
ordinarily, have the supply of loanable funds and the creation 
of capital any necessary relation to the prevailing condition 
of plenty or scarcity in the industrial society. It is true that 
there is a theoretical outside limit to the amount of capitaliza- 
tion which can take place during any particular period. Only 
so much productive energy can be diverted to future produc- 
tion as can be spared from the necessities of immediate con- 
sumption. But the demands of immediate consumption are 
very flexible. Practically, no limit exists of any sort except 
the food limit ; and the supply of food being mostly periodic, 
and, if scanty, incapable for a period of some months of 
being largely affected by an immediate application of labour, 
and not ordinarily increased above the average by the applica- 
tion of an exceptional amount of labour to the production of 
a new crop, it results for practical purposes that the amount 
of labour applicable to remote ends is not greatly lessened by 
insufficient harvests. It may, indeed, be increased by the sharp 
competition of wage-earners to obtain as large a share as pos- 



128 OUTLINES OF ECONOMIC THEOEY 

sible of tlie short food supply. It is true that this view leaves 
out of consideration the average of years ; for, in this average, 
a sufficient number of labourers will devote themselves to the 
production of a supply of necessaries sufficient to meet the aver- 
age demand. Normally, the application of energy for future 
purposes must be secured from labourers not requisite to this 
production of necessaries for immediate consumption. But 
how much of this labour, possibly applicable to remote ends, 
will be so applied, will depend not on the possessors of cap- 
ital in the form of shops, and tools, and lands, nor upon the 
possessors of products ready for consumption, but upon the 
possessors of these choses (claims) in action against society or 
against individual members thereof, — these rights of direction 
of labour, of which bank and savings deposits form a large 
proportion and are typical examples. Nor, usually, does any 
possessor of material property or wealth become effectively a 
capitalizer until he has parted with his material wealth and 
become a holder of some proportion of these rights. Capitali- 
zation in practice ordinarily takes place through transfer, in 
the form of loans, of these rights of direction to projectors 
of enterprises. A borrowing of products instead of rights 
may result in capitalization, without involving any preceding 
saving, — in that case, however, necessitating a concurrent de- 
creased production of commodities for immediate consump- 
tion. It is true that the borrowing may have resulted in the 
consumption of really surplus products, but more commonly 
the borrowing is of these saved rights of direction. When 
payment of a loan is made, it is commonly made not in com- 
modities, but in the right to commodities or labour, and this 
right is often used, not in obtaining these commodities for 
purposes of mere consumption, but in a new direction of labour 
or wealth to the creation of more capital. 

Credit relations ^® Conclude, then, that whether capitaliza- 

are the reservoir tion does or does not take place is practically 
of loan funds. independent of the total supply of consumer's 
wealth, whether in excess or scarcity. The question is sub- 
stantially one of whether the persons having the right to 



CAPITAL 129 

consume are disposed to exercise that right in one direction 
or in another. 

108. A thorough grasp of this truth is necessary to a full 
understanding of the subject of interest. The usual definition 
of interest as the hire of capital, or as compensation paid for 
the use of capital, opens the way to possible misconceptions as 
to the real nature of capital. It may be true that borrowing 
commonly takes place in order to obtain capital, but that which 
is borrowed is commonly a mere right to wealth. It is not 
essential that the right borrowed be used in the acquirement or 
production of wealth. The proceeds of the borrowing may be 
expended in luxurious living expenses, in education, or in vice. 

If the term " loan funds," or some equivalent, were used to 
indicate the subject-matter of borrowing, a deal of confusion 
would be avoided, and less hazy conceptions would find place 
with regard to the " centres of capital " and the " increase of 
capital " and the " countries rich in capital." 

Capital is wealth used as an aid in the reproduction of wealth. 
Loan funds are something entirely different, — the mere right 
to obtain possession of capital or wealth, or to direct the appli- 
cation of productive energies. The abundance of loan funds 
is measured more by degree of complexity in credit relations 
than by the quantity of wealth or capital in actual existence. 



NOTES . 

Every one is aware that England has much more immediately dispos- 
able and ready cash than any other country. But very few persons are 
aware how much greater the ready balance — the floating loan fund, 
which can be lent to any one for any purpose — is in England than it is 
anywhere else in the world. A very few figures will show how large the 
London loan fund is, and how much greater it is than any other. The 
known deposits — the deposits of banks which publish their accounts — 
are, in 

London (31st December, 1872) . . . £120,000,000 

Paris (27th February, 1873) 13,000,000 

New York (February, 1873) 40,000,000 

German Empire (31st January, 1873) . . 8,000,000 



130 OUTLINES OF ECONOMIC THEORY 

And the unknown deposits — deposits in banks wliicli do not publish 
their accounts — are in London much greater tlian those in any other of 
these cities. The bankers' deposits of London are many times greater 
than those of any other country. 

— Walter Bagehot (England), Lombard Street, c. 1, p. 4. 

The latest (1895) estimate of bank deposits in Great Britain places 
them at £700,000,000. 



INTEREST 



Mention the different reasons for which one might desire to borrow 
money. 

If for use on a farm, what would determine the rate which one could 
pay ? 

Could a starving man afford to borrow at 100 per cent per annum ? 

Is a given amount of wealth always of the same total of utility to you ? 

Does a loaf of bread vary in its utility ? 

Is money always of constant utility per unit ? 

Does the borrower get an advantage from borrowing ? How ? 

The lender from lending ? How ? 

109. Money is seldom an object of desire for itself. As in 
the sale of commodities for money, the ultimate remuneration 
to the seller is not in the money received, but in the commodi- 
ties into which he later exchanges the money ; so in the bor- 
rowing of money or other forms of loan funds, the thing desired 
by the borrower is commonly not the money or the borrowed 
right, but the wealth or capital into which the borrowed fact 
may be exchanged. To say, then, that interest is compensa- 
tion made for the use of wealth, is obviously not an unreason- 
able statement, though we shall shortly find reason to question 
its entire accuracy and exhaustiveness. 

The quickest way to produce wealth is not always the most 
effective way. If one were dependent for his living upon the 
results of the chase, he would do well to nourish himself some- 
what scantily, if necessary, for a time, in order to devote him- 
self not to hunting, but to preparing to hunt in a more effective 
manner, — to making for himself traps and bows or guns. 



CAPITAL 



131 



The roundabout way is ultimately tlie more productive of 
results. So instead of wading for fish, it is profitable to set 
aside a share of effort for the production of poles and lines. 
The traps or the poles illustrate the aid to production afforded 
by the use of capital. 

If one were without a fish-pole, and should wish to borrow 
the pole of another, it would manifestly be fair that the lender 
of the pole should receive some part of the prod- ^^ ^^^^ g^^gg -^ 
uct in fish. On these terms the owner could capital produc- 
possibly afford to part with the pole for a time. *^^^'' 
Even at a high rate of payment, the borrower, also, could 
afford to borrow. If poles could not be loaned at a rental, no 
one could be expected to have more of them than would be 
sufficient to answer his own requirements. 

A farmer finds that with the expenditure of $1000 in drain- 
age improvements, he can increase by $200 the annual pro- 
ductiveness of his meadow. If necessary, then, he can afford 
to pay nearly 20% for borrowed money with which to effect 
this improvement. If the market rate of interest is 6%, he 
can profitably borrow more than this f 1000. Svippose that 
the gain in productiveness from added increments of capital is 
as follows : 

)0 . . . 0150 5th, . . . . $10 

. 60 
. 50 

With the rate of interest still at 6%, he can afford to borrow 
at least f 4000 additional. To borrow yet a full 1000 more 
would profit him only as much as the necessary interest pay- 
ment. He will therefore borrow, say, 750 at an increase in pro- 
ductiveness of, say, 50. The account then stands as follows : 
1000 at 60 interest and 200 advantage. 



2d, $1000 . 


. 0150 


5th, 


3d, 


120 


6th, 


4th, 


90 


7th, 



1000 " 


60 " 




150 


1000 " 


60 " 




120 


1000 " 


60 " 




90 


1000 " 


60 " 




70 


750 " 


45 " 




50 


57,fi0 " 


.^4.^ " 




fiRO 



132 OUTLINES OF ECONOMIC THEORY 

Note that his demand for capital at an established rate finds 
its limit at the point where usefulness falls to a level with 
interest payment. Were some more effective method of 
ditching discovered, it might be advantageous to increase his 
borrowings. 

Note, also, that the limit of his demand is not at all affected 
by the amount which his preceding borrowings have already 
profited him. Each addition of capital stands on its own 
merits. 

The manufacturer likewise may find it of great profit to 
increase the volume of his business, or to improve his pro- 
cesses of production. He also stops at the point of disappear- 
ing advantage in view of the rates of interest which he is 
compelled to pay. 

110. If one has to-day a great appetite and no dinner, and 
will later have at his disposal two dinners but no increase of 
other rational appetite, borrowing will be to his enormous ad- 
demands for loan vantage, and, if necessary, he may pay enormous 

^'^ ^' interest rates without exhausting this advantage. 

Neither money nor wealth is of stable utility to men, but 
shifts in utility relatively to needs. So the young man ration- 
ally borrows the money with which to complete his education, 
counting upon paying from a later relative abundance. So 
the business man, in straits for means to save his credit from 
injury or his property from forced sale, pays with advantage 
for the right to await a better market, or for time to muster 
his resources. 

The cases mentioned are typical of the rational demand for 
loan funds to be expended as capital or otherwise. There is 
also an improvident demand, — the spendthrift's near-sighted- 
ness which mortgages a needy future in favour of a luxurious 
and wasteful present. 

111. The doctrine, therefore, that interest is merely com- 
pensation for the use of capital in virtue of its productivity, 
is not entirely tenable. 

First, as has been intimated, borrowing is not always an 
intermediate process in the hiring or buying of useful things. 



CAPITAL 133 

Money is sometimes an object of desire in itself; tlie demand 
for it exists at any given time, not merely for the purpose of 
effecting the current exchanges of products, but as well for 
obtaining discharges of obligations left over from earlier trans- 
actions. The volumes of unliquidated transactions remaining 
at different times vary widely, for reasons which we need 
not here discuss ; and the disposition to make or require imme- 
diate currency settlements, is a matter of constant variation; 
hence it often occurs that a rate of interest considerably higher 
— or lower — than would be paid for the use of utilities 
obtainable through currency, is paid for currency itself. 

The constant fluctuation of interest rates at money centres 
is largely a result of this demand for currency for what we 
may term non-intermediate uses. 

112. Interest is then to be defined as a difference in value of 
present over future goods. This difference results in part from 
the general tendency to underestimate the needs of the future, 
and to prejudice the future to the advantage of the present; in 
part from the fact that with the aid derivable from wealth, a 
larger product is possible than could be produced without such 
aid. That is to say, the demand for present goods 

on terms of a larger payment in the future is 
due in part to the helpfulness of wealth in productive proc- 
esses, in part to a desire for wealth for uses which are non- 
productive. This demand for unproductive uses depends in 
part upon the necessity for the liquidation of existing indebt- 
edness, in part upon the disposition of improvident men to 
discount the future, in part, also, upon the fact that in some 
cases a larger service is afforded by present consumption of a 
given sum of values than is expected to be sacrificed by the 
later payment of a greater sum. 

113. Over against this demand volume is the supply vol- 
ume. Many men have reason to expect greater needs in the 
future than those to which they are now subject. 

These men would save irrespective of the fact 

that saved values may be made to increase by interest. Other 

men save because, comparing present needs with future needs, 



13i OUTLINES or ECONOMIC THEORY 

and comparing tlie amount of wealth in hand with the amount 
which by the aid of interest additions may in the future come 
to hand, they find the course of abstinence preferable. Still 
others save from miser-like exaggeration of future needs, or 
from miser-like satisfaction in the mere possession of wealth. 
But whatever motives lie behind demand and supply volumes, 
the final fact is that they exist, and that the interest rate re- 
sults as a point of adjustment between them. This resulting 
rate expresses the relative market values of present and future 
goods. Capitalists have present goods for trade against prom- 
ised future goods ; borrowers promise future goods against 
present goods. The terms of sale are determined by the equa- 
tion point between demand and supply. 

114. To conceive of a loan as a sale 'of present for future 
goods, and of interest as the market premium of present over 
Productivity and f^^^^ure goods, is a great gain over the production 
use formulas formula, both in clearness and in exhaustiveness 

criticised. ^£ statement, and is due to the Austrian econo- 

mist Boehm-Bawerk. It includes whatever truth is contained 
in the doctrine that interest is compensation for the use of 
wealth. But interest paid upon a loan made for consump- 
tion purposes cannot be explained under the use formula, 
unless by referring interest to some use which some one might 
have made, but did not make. This explanation, however, 
must be regarded as insufiBcient, since, were all consumption 
loans changed to production loans, the rate of interest would 
tend towards fall by reason of a larger supply and a resulting 
lower marginal productivity of capital. 

No one factor in demand should be mistaken for the entire 
market demand. Nor should we commit the error of mistak- 
ing one factor in supply for the entire supply, as have those 
theorists who regard interest as mere reward for abstinence. 
We are not concerned to inquire whether the marginal bor- 
rower borrows for purposes of production or for purposes of 
consumption, or to inquire what use for the wealth offered 
for loan the marginal would-be borrower may have had in 
thought. Nor from the point of view of supply, are we con- 



CAPITAL 135 

cerned to know whether the marginal lender is at choice be- 
tween loaning and consuming, or between loaning and some 
manner of productive application of his capital in connection 
with his own supervision and effort. 

The terms of sale of present against future, goods — that 
is to say, the rate of interest — are determined in a competitive 
market through the adjustment of demand and supply. 

115. It is to be noticed that in this adjustment allowance 
must be made — first, for imper:fect competition; secondly, for 
differences in volume and intensity of demand 
at different places and times ; thirdly, for differ- J"fjf * '°°'^'" 
ences peculiar in point of supply and demand 
to some particular forms of wealth or capital. 

(1) It often happens that by reason of ignorance of the 
market, or non-acquaintance with lenders, or by reason of lack 
of reputation and standing in the market, or by reason of 
oppression or injustice on the part of the lender, a rate of in- 
terest is demanded and paid which is, in a measure, not com- 
petitive in character and cannot be fully ascribed to difference 
in risk. Eor example, a merchant doing business with a 
banker, and in need of money, may be compelled by the 
banker to pay almost any rate of interest. The banker alone 
is likely to be familiar with the business situation of his cus- 
tomer, and if the banker will not loan, no one else will. 

(2) The opportunities for profitable applications of capital, 
and the rates of return to be derived from increased applica- 
tions, as well as the total supply of loan funds offered in the 
market, differ at different times and in different places ; and 
although the resulting differences in rates of interest, so far as 
higher rates are not ascribable to risk, tend to be overcome by 
more rapid local increases in loan funds and by displacements 
and inflows from other localities, yet these differences in inter- 
est rates are of considerable permanence. 

(3) Not all forms of income-paying wealth are held and 
owned with equal regard to what are ordinarily considered as 
income-bearing capacities. In a general way it is doubtless 
true that upon different sorts of income-bearing wealth, mar- 



136 OUTLINES OF ECONOMIC THEORY 

ket values are usually adjusted iu proportiou to the incomes 
derivable therefrom, and that the tendency to such an adjust- 
ment is constant. But this is only approximately true unless 
the notion of income is expanded, as it ought to be, beyond its 
usual signification. The possessor of a picture may receive 
some portion of its income-bearing revenues in definitely mar- 
ketable advantages, but receives probably a larger proportion in 
direct personal satisfactions. Land-rents bring to many land- 
lords low rates of interest on market values, the difference not 
being fully explicable by difference in risk. The deficiency is 
compensated by social or other advantages attaching to the 
position of landlord.^ 

But after making the necessary allowances for various forces 
affecting both the demand and the supply of loanable wealth, 
including powers of direction over wealth or energy, — differ- 
ences between the present and future values of wealth are de- 
termined in conformity with the forces determining the value 
of other commodities through the competitive adjustment of 
demand and supply. 

116. Different men, differing in aptitudes for the profitable 
employment of wealth as capital, some of them having, in fact, 
no purpose to employ wealth as capital at all, 
but only for personal consumption, — some of 
them borrowing currency for purposes of debt-discharging, 
enter the loan market, demanding loans differing both in 
amounts and duration. On the other hand are possessors of 
capital and currency and rights of direction over labour and 
wealth, possessors who have different abilities 
and dispositions personally to utilize their own 
possessions and who are disposed to loan, if necessary, at dif- 
ferent rates of interest, and are desirous of making investments 

1 Boehm-Bawerk regards all of these income utilities as aspects of consump- 
tion — -denies that a house, for example, is productive in any sense, and traces 
the market value of the use of property of this sort to the power of the same 
wealth invested otherwise of commanding remuneration. I cannot agree. A 
ditierence between the present and future value of a house might exist even 
did the house not deteriorate, and even were there no other productive use 
possible for the capital invested. 



CAPITAL 137 

for different periods of time. It is, therefore, intelligible that 
loans for a given period should, in the adjustment of demand 
and supply, command in some cases a higher, and in other 
cases a lower, per annum or per diem rate than other loans 
for a different period. And we find that the rates for long- 
time, short-time, and call loans do in fact greatly fluctuate 
upon the market relatively to each other. 

117. At the rate as determined upon the market many 
lenders receive a high rate of interest relatively to the income 
which they could or would themselves make 
from their possessions. Many borrowers obtain Q^^^i-rents a 

^ -^ part of profits. 

their loans at a very low rate of interest com- 
pared to the advantages they expect to derive, and will 
derive, from the use of the loans arranged. This surplus 
of advantage is no part appropriable by third persons in 
the form of interest, w^ages, or rent, but forms a part of the 
remuneration of the labour of management. This surplus 
may be helpfully conceived as a kind of rent accruing always 
to ability of management, and appearing as one element in 
profits. 

Thus it appears that the rate of interest offered and paid 
does not tend to fix itself at the average of advantages believed 
to be derivable from the loans made, but at the 
minimum advantage expected to be derived from , e marginal 

° ^ doctrine. 

any of the loans made or from any part of any. 
That is to say, there is in the loan market a clearly defined 
marginal utility for any class of loans, which marginal utility 
is the normal rate of that class. The demand for capital — 
that is, for wealth for purposes of reproduction — forms the 
most considerable part of this borrowing demand. It is thus 
evident that the discovery of a new field for capital, or of 
new opportunities for the more productive employment of cap- 
ital, will, by increasing the demand, tend, other things being 
equal, to raise the rate of interest. Increases of capital, with- 
out enlarging opportunities for productive uses, must make 
toward fall in interest rates. There is nothing, however, 
peculiar in theory to interest in this respect. 



138 OUTLINES OF ECONOMIC THEORY 

EISK 

118. Something must be said of the relations of risk to 
interest. Indeed, the question of risk has many important 
The line between Connections with many aspects of economic 
production and theory. It was remarked in Section 66, that so 
distribution. ^^^ ^^ gain is mere compensation for risk, it 

cannot be included accurately within the terra profit, which 
strictly used points only to compensation for the personal 
element in economic activity. Evidently the line between 
adequate compensation for risk and the compensations for 
enterprise and far-sightedness is hard to draw. In fact, 
there are gains which come to men as altogether unearned — 
by mere luck or chance — which are hard to include in any 
economic category, and which have been by German economists 
specially distinguished under the term conjuncture profits. 
For example, one buys a tract of land upon which coal or 
iron is afterwards discovered, or a town lot which enhances 
in value through the location of public buildings or by the 
construction of a railroad; or one stumbles upon a nugget 
of gold, a valuable invention, or a new industrial process. 
It is difficult to regard these as cases of compensation. In 
these cases of fortunate discoveries in science, the- difficulty 
does not strike one as so considerable. On the other hand, 
when one receives a fortune by gift or inheritance, we regard 
it as a mere question of distribution of wealth and trace the 
title back to that of the giver. 

Bearing in mind all the while that the line is hard to draw 
between merit and luck, — effort and gratuity, — we may yet 
place all these cases in one of the two categories, produc- 
tion or distribution. The fortunate individual is either the 
producer, the bringer forth of wealth, or he is the receiver of 
wealth already in existence. In the latter case, he is the lucky 
recipient, under a seemingly lawless system of distribution, of 
a social product or of a gratuity of nature. Possibly it would 
be well that society should assert its claim to many of these 
gratuities, as has been attempted at some time in some sys- 



CAPITAL 139 

terns of jurisprudence, as, for example, under the ancient law 
of treasure-trove, and of jetsam and flotsam, or in later years 
under the state ownership of all mineral deposits. But in the 
present state of society, the list of " conjuncture " profits is a 
considerable one, and can hardly in any society entirely fail of 
place. In moral, as well as in theoretical aspects, we shall 
find the subject of speculation to brush constantly against this 
difficulty. 

119. How risks shall be treated as related to interest, de- 
pends something on the notion of interest which one adopts. 
Viewed as the reward of abstinence, interest 

clearly cannot include the risk share in the ^'^^'^^^^ 
>^ _ _ interest. 

amount received. Viewed in any sort as com- 
pensation to the owner for depriving himself of the use of his 
capital, risk cannot enter. Viewed again as the difference 
between the present market value and the future market value 
of wealth, interest cannot cover risk. To include risk, interest 
must be defined as the difference between a present value and a 
probable future value. Adopt, however, not the standpoint of 
the lender of market values, but the standpoint of the borrower, 
and risk takes on another aspect. Omitting from consideration 
all cases of dishonest borrowing, — where the borrower does 
not intend to pay, — and omitting, also, all cases where the 
borrower is consciously speculating on the possibility of his 
becoming unable to pay, interest becomes a payment for the use 
of capital, or more accurately a payment for the difference in 
value to the borrower of present over future goods. As applied 
to the marginal borrower, interest is the full equivalent for 
this difference. The fact which we are interested to observe 
is that the risk payment is received by the lender in one char- 
acter, and is paid by the borrower in another. It is a quantity 
which separates them, — a kind of neutral ground. It profits 
the lender nothing; it burdens the borrower; it presses as 
an incubus on the loan relation. In fact, it burdens the lender 
by working out a reduction of the net or pure interest received 
by him ; this truth, however, must be taken on trust for the 
time being. For theoretical purposes, risk may be regarded 



140 OUTLINES OF ECONOMIC THEORY 

as in analogy to a tax imposed upon the relationship of debtor 
and creditor. Discussion as to the incidence of this tax — its 
distribution between borrower and lender- — -must be postponed 
until we are prepared for a discussion of the general topic of 
taxation. 

Suggestive Questions 

In what case does a physician treat his horses as capital ? In what 
case as mere consumption goods ? 

Would an increased supply of money affect the crop from any piece of 
land ? The butter made from any cow ? The ratio between the yearly 
output — dividend — and tlie market value of any property ? 

Assuming that doubling the currency would double the price of cows, 
sheep, and farms, would it do the same thing for calves, lambs, and 
harvests ? 

What effect, then, on interest rates ? 

In what sense is interest a ratio ? 

What forces determine this ratio ? Which is ultimate ? 



NOTES 

The price of a loan is not altogether founded, as one might imagine, 
upon the profit, which the borrower hopes he will be able to make with 
the capital, the use of which he buys. This price is fixed, like the price 
of all commodities, by the debate between buyer and seller — by the 
equation of offer with demand. Men borrow with all sorts of views and 
for all sorts of motives. This one borrows to enter upon an enterprise 
which shall make his fortune ; that to buy a tract of land ; another to 
pay a gambling debt ; still another to cover a loss of revenue due to acci- 
dent ; yet another in order to live until he may earn something by his 
labour. But all of these motives which influence the borrower are alto- 
gether indifferent to the lender. This latter is concerned but with two 
things, the interest which he shall receive and the safety of his capital. 
He takes no more thought of the use to which the borrower will put it 
than does a merchant of the use which a buyer will make of the food 
supplies which he buys. — Turcot (France), 1727-1781. Translated from 
GEuvres de Turgot (Guillaumin), T. 1, p. 47. 

We have already noticed that the demand for new capital to be pro- 
ductively invested, depends, at any particular time, not upon the actual 
productiveness of such capital, but upon the general estimate of what it 



CAPITAL 141 

will produce. There seems, indeed, no ground for supposing that this 
estimate tends, on the average in the long run, to diverge decidedly from 
the facts in either direction. But experience shows that the general view 
of the possibilities of profitable employment of capital is liable to marked 
ebbs and flows. — Sidgwick, Principles, p. 368. 

Capital is an immediate product of nature and labour, nothing more. 
Its own origin, its existence, its subsequent action, are nothing but stages 
in the continuous work of the true elements, nature and labour. They, 
and they alone, do everything from beginning to end in bringing consump- 
tion goods into existence. The only distinction is that sometimes they 
do it all at once, sometimes by several stages. In the latter case the 
completion of each stage is marked outwardly by the appearance of a 
fore-product, or immediate product, and capital has emerged. . . . Capi- 
tal is an aggregate of products destined, not for immediate consumption 
or use, but to serve as a means of acquisition. . . . So, just as everybody 
would include among instruments of production and capital the horse and 
cart which assist the peasant in carrying in his grain and wood, must we 
reckon as capital the objects and apparatus of that more extensive "lead- 
ing in" of the national harvest — the conveyed products — the streets, 
rails, ships, and the commercial tool, money. . . . The greater the stock 
of capital, the larger is the share taken by the productive powers of the 
past in providing means of consumption for the present, and the less are 
the new productive powers of the present drawn on for the present. 

— Boehm-Bawerk, Positive Theory of Capital, c. 3, passim. 

What, then, are the capitalists as regards the community ? In a word, 
they are merchants who have present goods to sell. They are fortunate 
possessors of a stock of goods which they do not require for the personal 
needs of the moment. They exchange this stock, therefore, into future 
goods of some form or other, and allow these to ripen in their hands again 
into present goods possessing full value. 

— Boehm-Bawerk, Positive Theory of Capital, p. 358. 

There are three factors, each of which, independently of the other, is 
adequate to account for a difference in value between present and future 
goods in favour of the former. These three factors are : The difference 
in the circumstances of provision between the present and future ; the 
underestimate, due to perspective, of future advantages and future goods ; 
and finally, the greater fruitfulness of lengthy methods of production. 

The needy and the careless value present goods more highly because 
they urgently require them in the present or think only about the present ; 
the well-off and the saving value them because they can accomplish more 
with them in the future. And thus, in the long run, every one, whatever 



142 OUTLINES OF ECONOMIC THEORY 

his economic position and wliatever his economic temperament, has some 
ground for valuing present goods more highly than future. 

— Boehm-Bawbkk, Pos. The. of Cap., p. 277. 

' ' Experience has shown that peasant cultivators are liable to become 
loaded with debt to money-lenders who, either through the absence of 
effective competition, — partly in consequence of a certain discredit that 
often attaches to their business, — or perhaps, sometimes, through un- 
a vowed combination, are enabled to exact very onerous interest." 

— SiDGwicK, Principles, p. 539. 



CHAPTER X 
WAGES, PROFITS, AND DISTRIBUTION 

What is the effect of machinery on the average productiveness of 
labour ? 

What effect on average consumption of products ? 

Is machinery humanity's assistant or its competitor ? 

Is machinery the labourer's assistant or his competitor ? 

Would wages be higher if we had one arm instead of two ? 

Would wages be higher if our environment were poor ? 

Would wages be higher if our strength were less ? 

Would wages be higher if our intellects were weak ? 

Would wages be higher if our scientific knowledge were small ? 

Would wages be higher if our control over natural forces were small ? 

Would wages be higher if we had to use gas for heat in place of sun- 
light ? 

If products can be produced at small effort, will labour be well or ill 
rewarded in commodities ? 

We are now prepared for a more extended examination of 
wages and profits than was possible in Sections 61-64. The 
identity in principle of wages with profits was there shown. 

120. In Section 61 was examined the proposition that but for 
the reproductive power of the land and the aid afforded by the 
powers of nature, labour products could never jj^^g ^^j^g ^^ 
surpass in value the value of the labour applied, product depend 
From the point of view which we have adopted "^^^'^^^ 
this statement is unintelligible. Labour has no value in itself. 
Its results have value, and it is only in this secondary sense 
that value can be predicated of labour. Indeed, this is equally 
true of all utilities which fall within production rather than 
consumption goods. 

143 



144 OUTLINES OF ECONOMIC THEORY 

It is unquestionable that utilities may be created by labour 
without the aid of natural forces or of any of the reproductive 
powers of nature (Section 61). It is nevertheless true that 
the reproductive energies of nature furnish the sole oppor- 
tunity to procure food, and that most industrial processes 
derive great aid from natural forces such as electricity, 
chemical action, gravitation, heat, and the expansive power 
of steam. It is in these, for the most part, that the machine- 
using industries exhibit a productive superiority over the hand 
industries. But all the processes by which natural energies 
are made of service in production require the cooperation of 
human effort. These natural forces stand, then, as aids or 
multipliers of human energy. 

121. With varying abilities, moral, intellectual, and physi- 
cal, and with varying intensities of desire for the satisfactions 
possible through effort, men set themselves to 
e uat^on°°^ ^^^^ production of utility, applying thereto their 

energies directly in the form of labour as well as 
indirectly in the form of capital, and applying also thereto such 
natural forces and opportunities as they may have been able to 
appropriate. So far as measured by competitive market adjust- 
ments these appropriated forces and opportunities, under the 
form of land, patent rights, and capital, are marginally deter- 
mined to aid in the creation of values, they bring to their pos- 
sessors the remunerations analysed under the forms of rent and 
interest. So far as human energies directly applied are deter- 
mined to aid, they bring to their possessors the remunerations 
indicated under the term "profit" or "wages." 

Each labourer — the term "labourer" being intended to in- 
dicate any sort of economic actor — determines for himself, as 
best he may, the line of activity which will involve for him the 
minimum of sacrifice. He does not decide the question after 
the manner of some hypothetical or abstract economic man, who 
seeks solely that line of activity in which he can obtain the 
maximum of wealth. Men in actual affairs do not in all cases 
follow the line of their highest producing capacities. They 
follow in a considerable measure lines of taste or even of lack 



WAGES, PROFITS, AND DISTRIBUTION 145 

of energy or of weakness. It is not at all uncommon that a 
man prefers to preach or to paint at one income, rather than to 
do something else at twice that income. Many men prefer to 
study without salary, other men to do nothing at all on the 
same terms. The wage received by an artisan may be materi- 
ally less than that which he is conscious of being able to earn 
in some less congenial work. The profits of whiskey selling 
are in some countries far above a fair remuneration for the 
intelligence and energy required in the business. 

The motives, however, which induce men to follow certain 
lines of activity instead of certain others, have no influence on 
the wages or profits received therein, except in ^^^^ influence 
so far as these motives influence the supply of has labour supply 
labourers in any particular line of production, °'^'^^ses. 
thereby affecting the market supply of that line of products. 
Whatever may be the influences involved, whether of con- 
geniality of the work, or of the profits obtainable, or of hered- 
ity or habit or capacity, the ultimate fact is that at a certain 
price at which the market will consume a certain quantity of 
commodities, there are for various reasons, among which price 
in most cases figures as the most important, sufficient products 
to supply the demand. Should an intensified demand raise the 
price, the number of persons willing to forego other lines of 
activity or idleness and to enter this employment would doubt- 
less be increased. The supply of commodities in this line 
might also be affected by changes in the capacities and prefer- 
ences of workers, or by modifications in the public esteem in 
which the employment was held. 

It must all the while be held in mind that these changes in 
capacities and preferences are matters of slow accomplishment. 
Capacity and incapacity tend to perpetuate them- 
selves through heredity and education. Lack of "y'^g'^^^ ^^^ 
means in the parent may result in the inability 
of the child to become more than an unskilled labourer. Prom 
a theoretical point of view, this seems to cover all that is im- 
portant in the doctrine of non-competitive groups. 

122. An investigation of wages and profits is, therefore, 



146 OUTLINES OF ECONOMIC THEOKY 

from one poiat of view an investigation of the causes modify- 
ing tlie demand for particular goods, and of the causes modi- 
fying the supplies of labour energy applied to 
Wages a question -^ » ^^ , . 

of demand and the production of these goods. Thus wages m 
supply of prod- g^j^y particular employment may be permanently 
low if by force of public opinion or law, or by 
lack of aptitude for other employments, certain large classes 
of workers are restricted to few employments. 

This, taken in connection with relatively inferior productive 
energies, is the explanation of the strikingly low average 
wages of women. If countless women go into 
wa^eTiowT^"^'^ shirt-making, they must get, per shirt, wages cor- 
responding to the low price at which shirts must 
be sold in order to market the whole product. Prices fall to 
the measure of the marginal shirt, and wages for all shirt- 
makers come to be fixed at this same margin. Nothing can be 
done in the case but to decrease the number of shirt-makers, 
or to find a way by which people shall be willing to buy the 
same number of shirts at a higher price per shirt. This last 
is not only impossible, but would, if possible, bring about the 
production of still more shirts. 

That the wages of one employment are high is due, pri- 
marily, to the fact that society consents to consume at a high 
price the goods produced; but that these wages continue 
high is due, secondarily, to the fact that the quantity of labour 
energy applied to that employment is for some reason or 
other limited. The goods produced, and therefore the labour 
thereto applied, command a scarcity value. This scarcity may- 
result from the rarity, relative to the demand, of inherited or 
acquired capacity, or from the indisposition of labourers, for 
some reason, to enter this line of employment. 

123. If all men were labourers, each working 
What is starting- ^^^, himself, the problem of wages would not be 

point in wages . . 

problem— the over-complex ; the entire social product would 
independent constitute the social dividend, — market values 

labourer? , , -, ■ ^ ■ , j^ i 

would determine the gross receipts of each pro- 
ducer, competition between producers would fix the compensa- 



WAGES, PROFITS, AND DISTRIBUTION 147 

tions paid for land and capital. These payments deducted 
from the gross receipts would leave net wages or profits. 
Land and capital would be estimated in point of their remu- 
nerations by their final increment of desirability. 

This is not difficult to see in regard to capital ; the rate of 
interest must be low enough so that all loan funds seeking 
investment shall find takers ; the rate is the lowest rate of 
desirability among actual borrowers. Different units of capi- 
tal do not differ in desirability ; that is to say, loan funds do 
not differ in quality : it does not matter whose brand you 
borrow. 

The analysis is a little more difficult Avith land; here the 
commodities offered are not of exact similarity. The case is 
in some degree like that where one monopoly possessor offers 
a commodity to the competitive bids of different seekers. 
Nevertheless, other lands fix narrow limits within which this 
one-sided competition can act. At any great increase of rent 
or price, other lands become relatively more desirable. Thus 
rents so adjust themselves that each piece of land commands a 
rent corresponding to the service it renders over and above the 
land obtainable without rent payment; that is to say, a rent 
proportional to the advantages which the possession of the 
land commands. 

124. Or, were it possible to regard land and capital, or the 
owners thereof, as a class employing labourers, the analysis 
would be relatively easy. Machines require men to run them, 
and land requires a force to work it. Market 
values would become adjusted by processes al- I^j^^j.-^ ^ 
ready analyzed, and in view of these market 
values the competition of employers to obtain workmen would 
force the wages up to the point of the marginal productivity of 
labour. To illustrate : So long as the land-owner could increase 
his crop of wheat by five bushels through the employment of 
an additional labourer, he would pay, if necessary, approxi- 
mately this amount of wheat or its money equivalent in order 
to obtain the labourer. If land were of such quality and 
abundance, and other industries of such degrees of productive- 



148 OUTLINES OF ECONOMIC THEORY 

ness, and capital at so high a rate of interest, that all labourers 
willing to work in agriculture could be there employed without 
the last addition of labour failing to produce as much as five 
bushels of product, wages would stand in agricultural employ- 
ments at approximately this figure. The surplus over and 
above wages would go to the land-owner or to the capitalist. 
Suppose, for example, that the land-owner finds that by work- 
ing his farm alone he can obtain per day 10 of product. 

If he hires one man he gets net increase of . 9 of product. 
One additional, an additional increase of 
One additional, an additional increase of 
One additional, an additional increase of 
One additional, an additional increase of 

Increase from five labourers 



5.1 



35.1 



We have assumed that these labourers are of equal efficiency, 
each, so to speak, a labour unit. If differences are to be al- 
lowed for, we should merely need to change the figures to 9.1, 
7.9, 6.9, etc. Wages stand at a little over 5 per labour unit, 
the five labourers receiving in the aggregate 25 -)-. The differ- 
ence between this aggregate wage and the aggregate increase 
in production must go to the land-owner in his capacity either 
of owner or of supervisor of labour and capital. 

But it is not in fact correct to regard the owners of land and 
capital as a class employing labourers. Land-owners borrow cap- 
ital and capital-owners hire land. So, in the above example, if 
the land-owner finds that by buying or hiring a reaper he may 
discharge a man and thereby lessen his outlay without dimin- 
ishing his product, capitalistic processes will be substituted for 
labour processes. That is to say, capital and labour are in a 
certain sense competitors. 

125. Shall we find it more practicable to start from the 

point of view of the capitalist as the employer of land and 

labour ? But we have found that the compensa- 

is it the impren- ^^^^^ ^^ ^^^^ Capitalist, as such, is determined by 

the marginal productivity of capital applied to 

processes of production. That is to say, interest is explained 



WAGES, PROFITS, AND DISTRIBUTION 149 

by means of land and labour, and cannot therefore itself serve 
as the basis of explanation. 

These attempts at analysis appear to move in a circle — 
wages a residue after paying rent and interest — rent a residue 
after paying wages and interest — interest a residue after pay- 
ing rent and wages. Which is first — which is the centre ? or 
have we a case like that of the planets, a moving equilibrium 
where each is held in place by all, and all by each, and no one 
is primarily more cause than effect or more effect than cause ? 

126. However, Ave may start to unravel the tangle by recall- 
ing that capital does not in fact employ men — nor does land. 
These are all relations of men with each other. 

, It is man. 

Men employ the capital of capitalists. Land- 
lords employ men and the capital of capitalists. Capitalists 
employ capital from capitalists and land from landlords. Men 
employ each other. 

The problems of distribution are cases of men against men, 
and not of men against inanimate things. Where land-owners 
and capital-owners employ their own capital, they are also 
free to loan for hire or to hire more and other land and cap- 
ital. In their character as* men they are not lost or merged 
in the character of land-owners or capitalists. All utilities 
serve for the benefit of men. Production finds its outlet in 
consumption. The machine which does the work of men dif- 
fers for economic purposes from the labourer in this, that the 
labourer works for himself, while the machine works for some- 
thing not itself : its product goes to men and not to machines. 
Capital and land are means for human ends. Economically 
speaking, they exist not for themselves and are not to be per- 
sonified or made objective goals for any purpose. Capital does 
not serve for productive purposes excepting as subsidiary to 
man and directed by him. So of land. Neither is produc- 
tively independent. The economic point of view conceives of 
man as an actor, and of all other things as raw material at his 
hands. 

In the double sense, then, that demand is human demand, 
and supply the outcome of human effort, we look to solve 



150 OUTLINES OF ECONOMIC THEORY 

our difficulty by regarding man as the economic actor, and 
distribution in all its aspects as a question of reward for his 

activity. Capital and land are compensated 
are^esidue^'^°^*^ ^^ ^^^® measure of what they can profit man 

for the purposes of production. That which 
remains, after this service of land and capital has been mar- 
ginally fixed and payment rendered to the owners, goes to the 
producing man as the net reward of his efforts. 

127. This analysis is complicated, however, by the addition 
of another practically, if not theoretically, most important 

fact. There are what are called the employers 

The imprenditor. . •, • , . j i ; 

— men whose business it is to stand between 
labourers and the market — middlemen in production. The 
producers are not all independent actors. Some employ 
others. The distinguishing fact about these undertakers or 
imprenditors is exactly this, that they manage their fellows, 
and do it not for the profit of their fellows, but for their own 
profit. The imprenditor is not necessarily a capitalist — 
though he may be that also — or a land-owner — though he 
may be that also : he may as well, however, borrow or rent, 
and often does.^ As imprenditor, he is mere operator. 
Wolves hunt their prey in packs; men likewise often hunt 
value in herds. But there is this difference : the industrial 
hunt is not in motive cooperative, whatever it may work out 
to in results. The imprenditor pays the landlord and cap- 
italist what he must, purchases from labourers their utility- 
product as cheaply as he can, sells the result in the market 
at the best terms possible, and having assumed all the risks, 
appropriates all the gains. It is true that all the different 
productive elements may be centred in one man; he may 
labour at the bench or in the field ; he may be at the same 



1 Corporations illustrate the union of the functions of capitalist with those 
of imprenditor. Through directors elected by the stockholders and through 
officials chosen by the directors, the management of the corporation traces 
back to the stockholders. It is like a great partnership acting through a com- 
mittee of direction. The dividend received by the stockholder is a compound 
of interest on capital, true profit, and remuneration for risk. 



WAGES, PROFITS, AND DISTRIBUTION 151 

time land-owner and capitalist ; but lie is imprenditor simply 
in his capacity of employer of liis fellow-men — in Ms char- 
acter of industrial captaincy. 

The employer (imprenditor) class exist because, by reason 
of the possession in peculiar degree of capital owned or hired, 
or by reason of superior ability in management, or by reason 
of economies in production possible only in industries con- 
ducted on a large scale, they are able to procure from labour 
larger utilities, and to provide for it a larger recompense, risks 
being considered, than labourers could obtain from society 
without the intervention of the employer. It is always open 
to employes, if the imprenditor system seems to work them 
ill, to return to the system of decentralized industry where 
each labourer may be his own employer. 

The demand of the employer is an intermediate form of 
the demand of consumers for the goods produced. The em- 
ployer may be regarded as the agent or repre- 
sentative of the social demand, engaged in the ^^^igman"^ ^^ ^ 
purchase of the results produced by labor, and 
compelled by competition, if effective, to recompense labourers 
approximately in proportion to the services rendered. IsTo 
distinction in principle exists, for present purposes, between 
the goods commonly termed services, and those goods fixed 
and embodied in matter commonly termed commodities. 
Likewise, the occupations of merchants and carriers in the 
production of utilities of legal condition or of place, offer for 
present purposes no occasion for special treatment. 

Relatively to society, employers stand as a class of wage- 
earners whose remuneration, other things being equal, is com- 
petitively determined by the supply of them. This supply is 
modified by influences parallel to those recited with reference 
to labourers. As with other forms of wages or profits, so with 
imprenditors' profits, peculiar advantages in ability or capital 
will bring correspondingly large returns, the amount of the 
profit being mostly determined by the degree in which the 
imprenditor is able to reduce his expenses of production below 
those of the marginal producer. A tendency toward fall in 



152 OUTLINES OF ECONOMIC THEORY 

the profits peculiar to ability, analogous to the tendency toward 
fall in rents, exists in the degree that the differential advanta- 
ges of ability become by increase in intelligence and education 
less marked. 

128. But the ability of one employer to make large profits, 
relatively to another, is not entirely a matter of superior ability 
Evil aspects of ^^ production, nor to any great degree a matter 
imprenditors' of superior advantages in the possession of capi- 
competition. ^^^^^ since under present conditions aggregations 

of capital are readily made through borrowing or through stock 
companies. To some extent these differential profits result 
from superior ability and readiness in tricks of adulteration, in 
the lying of advertising, and in oppression of employes. The 
entire body of consumers suffer from the first two of these 
causes ; employes, individually, from the third cause. An ex- 
amination of the question of remedies lies outside of our 
immediate purpose. We are in the presence, however, of one 
of the most acute phases of the labour problem. Were all 
labourers capable of changing their places of habitation and 
their manner of occupation, were the question uncomplicated 
by their ignorance, improvidence, and lack of energy, and were 
some degree of oppressive combination impossible among em- 
ployers, there would always remain as causes of non-employ- 
ment the normal and abnormal changes and fluctuations in the 
conditions and methods of industry and the inertia and fric- 
tion of rearrangement. Through the famished competition of 
the unemployed, in itself an index of imperfect competition, 
the employer may always find himself largely set free from 
effective competitive laws, and to a considerable degree at 
liberty to profit at the expense of his employes by methods 
of injustice and oppression. 

ISTor is the matter greatly helped by the fact that, even of 
the wages of this oppression, employers are mostly dispossessed 
by the competition of other employers in the same lines. 
There is a strong tendency in business towards the survival 
of the morally most unfit, and toward the permanent estab- 
lishment of a low competitive plane of business morality. 



WAGES, PROFITS, AND DISTRIBUTION 153 

To illustrate : If all merchants adulterate their coffee, no 
one of them gets any benefit out of it, and some good beans get 
wasted. Yet, if the process is profitable for any, all are pressed 
toward doing it if any do it. Whenever skilful adulteration 
succeeds, those who practise it tend to gain the market. Lying, 
shoddy, and oppression are, in the degree that they are success- 
ful, forced upon competitors. And yet, since all folloAV, the 
benefits or evils do not for the most part remain with the com- 
petitors, but rest with the employes or are passed along to the 
consuming public. 

The wage-earner's assurance of receiving as wages an amount 
approximately equal to the value of his product, marginally 
determined, rests solely upon the effectiveness of competition 
among employers. His wage is, however, guaranteed from 
falling very low by the possibility which always remains to him 
of producing directly for the market. The practical difficulty 
is commonly that when the necessity arises, he is rarely pos- 
sessed of even that small capital requisite to find himself 
quarters, tools, and materials. Labour unions will one day 
find their best field of usefulness in this direction. 

Suggestive Questions 

If labourers in manufacturing get higher wages without higher effi- 
ciency, what will be the eifect on the price of their products ? 

Can they get such higher wages without a lower total product to be 
sold? 

Who will be injured? 

If labour unions increase the efficiency of labourers, who will get the 
benefits ? 

Will the direct effect be to raise or lower their own wages per piece ? 

How about decreased efficiency ? 

What harm is done by putting paper soles into shoes ? Who suffer ? 

Would workmen be benefited if labour organizations acting together 
should stop " scamping" ? 

Is it well for society that apprentices be restricted from entering a 
skilled industry ? 

In what ways do the unemployed injure the employed ? 

Do you see any way for labour organizations to manage this problem 
of the unemployed ? 



154 OUTLINES OF ECONOMIC THEORY 

Under influence of labour unions does remuneration correspond 
accurately to services rendered ? 

Wliat effect does this hiring labourers by the hundred have in good 
times on (a) employer's profits ? (&) the wages of eificient men ? (c) of 
inefficient men ? 

How does the system work in bad times ? 

If X. gets half as many yards of cloth from his machine as does A. 
from his, will X. get fully one-half the wages paid to A. ? 

Why ? 

What effect does prison competition have on (a) social dividend ? (b) 
wages of free labour ? (c) average consumption of wealth ? (d) taxes ? 

What effect from women's labour on (a) social dividend ? (6) wages 
of men ? (c) average consumption of wealth ? (d) morals ? (e) health ? 
(/) intelligence ? 

What would be the effect in the same directions of the eight-hour day ? 

What do you mean by fair wages ? 

What influences bear upon salaries different from those on wages ? 

Is competition equally effective ? 

How about honesty, fidelity, efficiency ? 

Is a school-teacher a producer ? 

Is the minister a producer ? 

Is a doctor ? 

Is a lawyer ? 

Does competition work in these cases in accurate fashion ? 

Is it possible, commonly, to get a cheaper teacher, doctor, or minister ? 

What holds up the remuneration ? 

Is there any meaning in "fair wages" with reference to salaries ? 

Do you suppose high government officials save much from their sal- 
aries ? Why ? 

Is a doctor's outlay for horses productive, or is it consumption ? 

How about the receptions which the President gives ? 

Is there any analogy here to the drummer's expense account ? 

Do officials take their pay, to some extent, in honour ? 

In what respects does this work well ? 

In what respects ill ? 

Is there objection from the point of view of justice ? 

Would a far-sighted farmer feed his oxen liberally ? 

A slave- owner his slaves ? 

Why not, then, an employer his employes ? 

In what sense do low wages tend toward lower wages ? 

Would a rise in the American standard of living — in average wages — ■ 
lead to a further increase in wages ? 

What effect should you expect on morals ? 



WAGES, PROFITS, AND DISTEIBUTION 155 



NOTES 

Labour adds to the wealth of its employer. The addition is necessary 
and continuous ; from the moment when the mill begins to run to the 
moment when it stops, labour, assisted by capital in different forms, is 
increasing the possessions of the man or the company that employs it. 
Let the wheel of the engine make a dozen revolutions : there is an inch 
more of cloth upon eveiy loom. The employer recognizes this addition 
to his assets, and would not fail to take account of it if he were making 
an accurate inventory. All through the day and the week the sum of his 
wealth is growing ; and when he pays his men on Saturday night, he takes 
the amount of their wages . . . from the value that has come into exist- 
ence during the working days. 

Let a man pump water into a full tank, and get what he wants for use 
from the overflow ; does the water for consumption come from the tank 
or from the pump ? In a sense from both ; and if important interests 
were dependent on the answer given, there would be here an opportunity 
for a fierce logomachy like that which has actually arisen over the origin 
of wages. The particular drops which are used come immediately from 
the tank ; but the amount in it is undiminished, and the draught virtually 
comes from the supply furnished by the pump. Moreover, the size of 
the tank has no influence on the amount of the overflow ; that is gauged 
by the volume of the inflowing stream. In like manner wages are taken 
immediately from a reservoir of capital ; but the amount in the reservoir 
is undiminished, since the quantity which was drawn from it has already 
been added to it by the stream of products resulting from industry. It is 
the volume of products which sets limits to the amount of wages. 

The hydraulic figure will perhaps bear straining to the extent of repre- 
senting one other fact in the relation of capital to wages. If the water 
which overflows from the tank be regarded as better in quality than that 
which is pumped into it ; if, for example, it loses its sediment by stand- 
ing, the service rendered by the reservoir corresponds to a certain useful 
office performed by capital. — Clark, Phil, of Wealth, p. 127. 

Have you ever had occasion to witness the fury of the honest burgess, 
Jacques Bonhomme, when his scapegrace son has broken a pane of glass ? 
If you have, you cannot fail to have observed that all the bystanders, 
were there thirty of them, lay their heads together to offer the unfortu- 
nate proprietor this never-failing consolation, that there is good in every 
misfortune, and that such accidents give a fillip to trade. Everybody 
must live. If no windows were broken, wliat would become of the 
glaziers ? Now this form of condolence contains a theory which it is 
proper to lay hold of in this very simple case, because it is exactly the 



156 OUTLINES OF ECONOMIC THEORY 



same theory which unfortunately governs the greater part of our eco- 
nomic institutions. 

Assuming that it becomes necessary to expend six francs in repairing a 
damage, if you mean to say that the accident brings in six francs to the 
glazier, and to that extent encourages his trade, I grant it fairly and 
frankly, and admit that you reason justly. 

The glazier arrives, does his work, rubs his hands, and blesses the 
scapegrace son. This is ichat we see. 

But if, by way of deduction, you come to conclude, as is too often 
done, that it is a good thing to break windows — that it makes money 
circulate — and that encouragement to trade in general is the result, I am 
obliged to cry halt. Your theory stops at what we see, and takes no 
account of what we don't see. 

We don't see that since our burgess has been obliged to spend his six 
francs on one thing, he can no longer spend them on another. 

We don't see that if he had not this pane to replace, he would have 
replaced, for example, his shoes, which are down at the heels, or have 
placed a new book on his shelf. In short, he would have employed his 
six francs in a way in which he cannot now employ them. Let us see, 
then, how the account stands with trade in general. The pane being 
broken, the glazier's trade is benefited to the extent of six francs. That 
is what loe see. 

If the pane had not been broken, the shoemaker's or some other trade 
would have been encouraged to the extent of six francs. That is ichat 
we don't see. And if we take into account what we don't see, which is a 
negative fact, as well as what we do see, which is a positive fact, we shall 
discover that trade in general, or the aggregate of national industry, has 
no interest one way or other whether windows are broken or not. 

Let us see, again, how the account stands with Jacques Bonhomme. 
On the last hypothesis, that of a pane being broken, he spends six francs 
and gets neither more nor less than he had before, namely, the use and 
enjoyment of a pane of glass. On the other hypothesis, namely, that the 
accident had not happened, he would have expended six francs on shoes, 
and would have had the enjoyment both of the shoes and of the pane of 
glass. 

Now, as the good burgess, Jacques Bonhomme constitutes a fraction 
of society at large, we are forced to conclude that society, taken in the 
aggregate, and after all accounts of labour and enjoyment have been 
squared, has lost the value of the pane which has been broken. 

— Frederic Bastiat, (France), 1801-1850. Translation by Francis 
Walker. See CEuvres Choisis (Guillaumin) Bastiat, p. 107. 

If we suppose free competition excluding combination — the remuner- 
ation of labourers paid by employers, so that the results of their labour 



WAGES, PROFITS, AND DISTRIBUTION 157 

become a portion of the employer's capital, is not determined in a man- 
ner essentially different from the remuneration of labourers who work on 
their own account and are directly paid by consumers : except that in 
the latter case the worker is commonly paid later, and therefore his 
remuneration must, ceteris paribus, be increased by interest proportioned 
to the interval that he has to wait for payment [and, we may add, to the 
risks which he has borne]. — Sidgwick, Principles, p. 307. 

Manual skill that is so specialized as to be wholly incapable of being 
transferred from one occupation to another, is becoming steadily less and 
less important. Putting aside for the present the faculties of artistic 
conception and artistic creation, we may say that what makes one occu- 
pation higher than another, what makes the workers of one town or 
country more efficient than those of another, is chiefly a superiority in 
general sagacity and energy which is not specialized to any one trade. 

— Marshall, Ec. of Ind., p. 141. 

There is thus no reason why a sudden fall in the demand for any 
particular kind of skilled labour [for its products] should not reduce its 
remuneration to the level of that of altogether unskilled labour ; or even 
below the average of this latter so far as the skilled labourer's previous 
habits of work have unfitted him for unskilled labour. Nor, indeed, is 
there any economic reason why an extensive change in processes or local 
displacement of any particular industry might not reduce the remuner- 
ation of any kind of labour in a particular district even below the point 
sufficient to furnish the labourers with the necessary means of life ; as 
they might be too numerous to be absorbed by such migration as their 
resources enabled them to effect. —Sidgwick, Pi-inciples, p. 320. 

In a society in which wealth is distributed as unequally as it is in our 
own, it is likely — quite apart from any influence of combination or gov- 
ernmental interference — that certain kinds of skilled labour will normally 
be purchased at an extra price considerably above that required to re- 
place, with interest at the ordinary rate, the expense of acquiring the 
skill, through the scarcity of persons able and willing to spend the 
requisite amount of money in training their children and supporting them 
while being trained. . . . Mill has pointed out that there are important 
differences in normal wages which are due to relative scarcities of various 
kinds : chiefly to scarcities arising from the unequal distribution of 
wealth, which limits the power of performing certain kinds of services 
to the minority of persons whose parents have been able to afford the 
expense of prolonged training and sustenance for their children. The 
freest competition has not in itself any tendency to remove these 
scarcities, unless the present inequalities in the distribution of wealth 
are first removed. — Sidgwick, Principles, 322. 



158 OUTLINES OF ECONOMIC THEORY 

The worse fed are the children of one generation, the less they will 
earn when they grow up, and the less will be their power of providing 
adequately for the material wants of their children, and so on. And 
again, the less fully their own capacities are developed, the less will 
they realize the importance of developing the best faculties of their 
children, and the less will be their power of doing so. 

— Marshall, Ec. of Ind., p. 278. 

It should be observed that when we speak of rare skill, the term is 
always used relatively to the demand for the products or services of the 
skilled worker. It is quite possible that a given kind of skill may be 
confined to an extremely small minority of the members of any commu- 
nity, and yet may be so abundant relatively to the demand, that no one 
l^ossessing it is able to earn extra remuneration for his labour. This is the 
case e.g. with the faculty of writing second-rate poems. . . . The com- 
petitive remuneration of any kind of labour does not tend to include com- 
pensation for the extra aversion felt to it by some of the labourers, except 
so far as such compensation is required to obtain the whole amount of 
the labour in question, that society is willing to buy even at the raised 
price. — SiDGwiCK, Principles, p. 327 n. 

There often came about with a falling demand an increasing supply, 
and, on the other hand, with improving conditions, a lessening of the 
labour supply which offered itself at the factories. Thus, for example, I 
found that the poor hand-weaver brought his children the earlier to their 
trade the more the trade was depressed, while better conditions enabled 
him to allow them to learn a better trade. The lad who, from his ten- 
derest years, has been occupied at silk weaving, as man rarely becomes 
an agricultural labourer, when agriculture prospers and silk weaving lan- 
guishes. His members, having become adapted to his inherited calling, 
make him awkward for almost every other. Thus, he by no means 
diminishes his production with falling demand ; on the contraiy, he 
lengthens his hours of labour, since, at the lower price, he can only in 
this manner supply his extreme necessities. — Lujo Brentano (Ger- 
many). Translated from Die Klassische National (Ekonomie, p. 10. 

The disagreeableness of work seems to have very little effect in raising 
wages, if it is of such a kind that it can be done by those whose industrial 
abilities are of low order. For the progress of sanitary science has kept 
alive many people who are unfit for any but the lowest grade of work. 
They compete eagerly for the comparatively small quantity of work for 
which they are fitted, and, in their urgent need, they think almost ex- 
clusively of the wages they can earn ; they cannot afford to pay much 
attention to incidental discomforts, and, nideed, the influence of their 
surroundings has prepared many of them to regard the dirtiness of an 



WAGES, PROFITS, AND DISTRIBUTION 159 

occupation as au evil of but minor importance. And from this arises the 
strange and paradoxical result that the dirtiness of some occupations is a 
cause of the lowness of the wages earned in them. 

— Marshall, Ec. of Ind., p. 275. 

In most occupations, even that part of the work which affords the 
worker more pleasure than pain, must, as a rule, be paid for at the same 
rate as the rest ; the price of the whole, therefore, is determined by that 
part of the labour which is most unwillingly given, and which the worker 
is on the verge of refusing to give ; or, as we may say, by the Marginal 
Disutility of labour. ... As with every increase in the amount of a 
commodity offered for sale, its marginal utility falls, and as with every 
fall in the marginal utility there is a fall in the price that can be got for 
the whole of the commodity, and not for the last part only, so it is with 
regard to the supply of labour. If there is an increase in the amount 
required of a certain kind of work, and some of it has to be done with 
greater difficulty so as to cause a greater disutility (sacrifice), then a 
higher price must be paid for this ; and the price of all the rest of the 
work will rise at the same time. This surplus price which has to be 
paid to all the rest of the labour in some respects resembles rent. 

— Marshall, Ec. of Ind., p. 103. 



TENDENCIES OF DISTRIBUTION 

Already in considerable part, though in fragmentary man- 
ner, questions of tendency in distribution have been covered. 
To some of the more difficult of the special problems, special 
attention will later be given under the titles of Speculation, 
Combination, and Monopoly. 

129. The problems of distribution refer to the subdividing of 
the social dividend between labourers, employes, land-owners, 
and capitalists. Put in different phrase, we are concerned 
with the forces and tendencies affecting the apiDortionment of 
the shares indicated under the heads of wages, — including 
salaries, — profits, rent, and interest. 

It may appear a truism to say that the first concern of soci- 
ety in the problem of distribution is to have what is relation 
the largest possible product to divide. In later between social 

. . , dividend and 

discussions we may find reason to question how the distributive 
far human weal is bound up with the maximum shares ? 
consumption of wealth ; but the question of distribution is 



IGO OUTLINES OF ECONOMIC THEORY 

evidently one for the various participants of how to obtain 
the largest outcome from the distribution. Back of distribu- 
tion, then, is production. 

For each of the factors in production there are but two pos- 
sible methods of increasing its distributive share: (1) By 
increase in the total social output, or (2) by increase in one 
share at the expense of some one or all of the other shares. 

Primarily, in the attempt to attain the highest possible social 
dividend, the interests of all are parallel. In the distribu- 
tive process, it is equally clear that the interests are adverse. 
When, for example, two lads go fishing or hunting on shares, 
harmony is probable until the time comes for dividing the 
spoils ; then peace is less certain. So partners in business are 
each as loyal to the partnership interests as either would be 
were the enterprise all his own. Against the business world 
they stand united. In the division of the profit and in the 
settlement of the partnership accounts they are not one but 
two. 

Unfortunately, production and distribution cannot be as 
neatly separated as is indicated by the above statement. All 
the producing factors are interested that the largest output be 
reached, but each is at the same time interested to get the 
largest share of this output. There arises another instance 
of that antagonism between utility and value which was re- 
marked in Section 34. It constantly falls oiit that while the 
interest of each is that the others should produce at the maxi- 
mum, it is also the interest of each that its own product be 
materially limited. A small product often has a greater mar- 
ket value than a large. It is better to receive 50% of 75 than 
30% of 100. 

Thus we must beware of the sweeping proposition that the 
interests of all classes or of all countries are parallel, — or that 
the interests of capital (capitalists) and labour (labourers), or 
of employers and employes are one. They are never so in 
distribution, and not always strictly so in production. This 
fact is strikingly illustrated in trusts, monopolies, and combi- 
nations. 



WAGES, PROFITS, AND DISTRIBUTION 161 

But excepting in cases of the sort just mentioned, the appor- 
tionment of the shares called wages, proiits, rent, and interest is 
brought about by ordinary competitive adjustments. 

130. We have analyzed in detail the origin, determination, 
and tendency of these four factors considered separately. We 
have observed the general tendency toward an The distributive 
increase in the social dividend through the de- shares considered 
velopment of man. Upon the assumption of an ^^^^^^ ^ ^■ 
increasing population we have observed the tendency toward 
an increasing proportional importance of rent, subject to such 
modifications as may be effected by progress in the arts of 
agriculture and transportation. We have remarked the ten- 
dency toward increasing supplies of capital ; but on account of 
the impossibility of forecasting future opportunities for the 
profitable use of capital, we have found the tendencies of 
demand for capital relative to supply to involve some degree 
of conjecture. There is a question, also, as to the direction 
and degree in which changes in> the hazards of loaning may 
vary the market interest in excess of net or pure interest. It 
is, however, evident that if no changes take place in the rate 

of interest, an increasing supply of capital will 

^ ■ -, J. i? ■ J. J. The share of the 

involve an increased aggregate of interest on cap- capitalist 

ital ; and even with diminishing rates, the increase 
in amount of capital may be such as to render possible an 
enlarging aggregate of returns. But it is not clear whether 
this aggregate would or would not tend to increase propor- 
tionally with the entire social product. Assuming, as is prob- 
able, though questionable, that opportunities cannot be found 
in the future for investment of continued increments of capital, 
except on terms of a tendency toward fall in rates of interest 
by reason of a lower marginal productiveness, there would 
appear to be a probable tendency tOAvard a constantly increas- 
ing social advantage on the use of capital. This social advan- 
tage — a quasi rent — must be distributed to the benefit of 
consumers generally, to employes, to wage-earners, or to land- 
owners ; but assuming a stationary population, or such im- 
provements in the arts of agriculture and transportation as to 



162 OUTLINES OF ECONOMIC THEORY 

negative an increase of rent, tliese advantages must inure to 
tlie wages of labour, or to the wages of management, or to the 
benefit of consumers as a wliole. 

These tendencies may be more clearly indicated by the use 

of a diagram. Assuming an increase in the volume of capital, 

and falling rates of interest resulting from this increase, a 

smaller proportional share of the increasing advantages from 

capital will go to capitalists and a larger share to society. 

^ Let the smaller triangle represent 

the present aggregate productiveness 

\ of capital, and the figure ABCD the 

\ share going to the capitalist by way 

\ of interest; AMB the advantages 

I ">. \ accruing to other members of so- 

I ^ \ ciety. Out of the increased advan- 

, I B \ 

^^ l"" " N \ r' tages of capital as represented by 

^_I_ ""n^ \, y the larger triangle, capital at a low 
^! -''-:^^ An' rate of interest is represented as re- 
ceiving an increased absolute return, 
A'B'CN', but a smaller proportion of the aggregate advan- 
tage. Society receives an increase both absolute and relative 
from ABM to A'B'M'. Interest might so fall, as, for ex- 
ample, to X.Y, that the share of capital should decrease abso- 
lutely. 

131. It is evident that, with a rising average of intelligence, 
the advantages from increased capital and improved produc- 
tive processes will tend in less and less degree 
The tendency ^^ ^^ intercepted by imprenditors under the form 
of profits, excepting possibly so far as the risks of 
business and the resulting compensations therefor may increase ; 
since a fall in profits must take place as the requisite ability 
for management becomes more general. This fall in profits 
results from a rise in the margin of ability and the consequent 
lessening of differential advantages, that is to say, from a larger 
and closer competition of employers with each other. Doubt- 
less some tendency toward a rise in the marginal productivity 
of capital would accompany the increased productive efiiciency 



WAGES, PROFITS, AND DISTRIBUTION 163 



of capital in the haiicUing of more efficient imprenditors ; but 
this tendency would be largely counteracted by further in- 
creases in the supply of capital. 

For the most part, then, the benefits of lower interest and of 
improvements in production will be passed along to wage- 
earners as a class, or to society as a whole ; in other words, the 
inquiry remains to us whether these benefits will be distributed 
among producers as a class or among consumers as a class. 

Perhaps upon closer analysis this inquiry will not be found 
over-full of meaning, since to the degree that land and capital 
aid in production their possessors may for this purpose be said 
to produce. Essentially, our problem is to determine whether 
the above-mentioned benefits are shared solely among wage- 
earners, or among all classes of producers, including therein 
land-owners and capitalists. A correct understanding of the 
subject of profits is necessary to this solution ; the detailed 
working of a reduction in prices must be examined. 

In the competition of different imprenditors with each other, 
market price measures the sacrifices of the marginal im- 
prenditor. Differential-profits can from no point of view be 
regarded as forming an addition to price. The marginal 
imprenditor is driven from business by the ability of his com- 
petitors to achieve economies in production to which he cannot 
attain : prices go too low for him. At the same time that prices 
are falling, the profits of imprenditors are becoming, by reason 
of a raised marginal efficiency, less. It thus appears that 
the imprenditor's savings in interest payments and his savings 
through economies in productive processes are passed along to 
other classes solely by way of reductions in price. It is, then, 
all classes of consumers who share the advantages of lowering 
interest and lowering profits. 

These views are so nearly parallel with those of Presi- 
dent Walker that it will be profitable to examine the diver- 
gence. President Walker reasons that in the distribution of 
the social dividend, whatever does not go to the landlord in 
the form of rent, or to the capitalist in the form of interest, 
or to the imprenditor in the form of profits, must go to the 



1G4 OUTLINES OF ECONOMIC THEORY 

wage-earner. If I understand him correctly, he considers tlie 
wage-earner as the residuary beneficiary of industrj'', gaining by 
whatever is deducted from rent, interest, or profits. Reasoning 
in substance as we have reasoned that profits must fall with 
increased siipply of imprenditors' ability, he concludes that the 
wage-earners must monopolize the advantages from this fall. 

But it is not so clear that the entire reduction from impren- 
ditors' profits goes to the increase of wages. President 
Walker's argument seems to rest upon the proposition that 
the competition of imprenditors must, in lowering the margi- 
nal profit and driving from business some of the competitors, 
increase directly the nominal wages paid. But it is to be 
remembered that these competitions of imprenditors are com- 
petitions within the limits of separate industries ; that com- 
monly the first effect of economies in production is to throw 
out of employment some portion of the employes ; that im- 
provement moves now slowly and now rapidly in each par- 
ticular industry. Thus, taking into view the extent of the 
labour supply relative to the improvement at any one time in 
any particular industry, it does not seem probable that appre- 
ciably higher wages could result directly from such improve- 
ment, even were the case one where an increased total of 
labourers was immediately called for. 

Thus, the lowering of prices due to employers' competitions 
is distributed between all market purchasers of products in 
proportion to their purchases. The fall in interest makes to 
the advantage of landlords, capitalists, employers, and em- 
ployes, in their character of consumers. The capitalist's 2% 
interest may purchase for him more of the good things of life 
than did his 4%, and this irrespective of the fact that, with 
an increase of capital, he will reckon his 'pev cent upon a larger 
base. 

But while the capitalist's share in the product of industry 
may increase absolutely, it cannot fail, with falling rates of 
interest, to decrease relatively to the other distributive shares. 
This is also true of the imprenditor's share, for reasons already 
sufiiciently set forth. 



WAGES, PROFITS, AND DISTRIBUTION 165 

It is, in fact, imprenditors and wage-earners who are 
th.e residuary legatees of industry. As it is the exercise of 
human energy which is the first fact, the actor „ 

'' . . Men generally — 

fact, in production, and as land and capital are not wage-eamers 
mere tools and auxiliaries in the process, so alone— the resid- 
human effort obtains the compensations of pro- 
duction after the possessors of land and capital have received 
their hire. Wage-earners may profit — probably will profit — 
at the expense relatively of the possessors of capital. They 
may profit, also, — though they probably will not — relatively 
or absolutely at the expense of the landlord. Relative tenden- 
Wages, also, are likely to trench relatively upon cies of wages 
profits; but that profits should decrease abso- ^'^^p^° *^- 
lutely is not probable, although it is doubtless possible. That 
imprenditors' ability should become more abundant, would 
tend to enlarge the social dividend ; but that it should tend to 
lessen the differential between the best and poorest impren- 
ditors is not a necessary result, unless in the tendency of 
modern industry toward consolidation the number of im- 
prenditors should lessen. Fewer imprenditors, relative to 
wage-earners, would tend toward a lower aggregate of profits 
relatively. Fewer imprenditors absolutely would mean a re- 
duced aggregate of profit, unless this should be offset by the 
general tendency toward advance in the remunerations of 
human activity. 

Questions 

Who are ultimately benefited by lower rates of interest following upon 
larger supplies of capital ? 

By lower rents ? 

By lower profits ? 

Do lower profits come about mostly through payment of higher wages 
or through fall in prices ? 

How does the marginal law apply to employers ? 

Do wages and profits tend to preserve any general relation to each 
other? (See Section 65.) 

Does the labourer get wages in proportion at all to the profits of his 
employer ? 

Ought he ? 



OUTLINES OF ECONOMIC THEORY 



The wage-paying ability of what imprenditor is commensurate with 
market wages ? 

Is this fair to tlie wage-earner ? 

Can it be clianged by trades-unionism ? 

Or in any other way ? 



NOTES 

Stanley Jevons has compared the process of production in which the 
three factors of production are joined together to the kitchen of the three 
witches in Macbeth^ who throw into their cauldron and stir up therein 
the most heterogeneous substances for the purpose of brewing their ' ' hell- 
broth." In such a blend as this how are we to set about finding what 
each man's share should be ? "What analysis shall we use, what law shall 
we follow, so as to arrive at this determination ? 

— GiDB, Political Economy, p. 424. 

"We shall never fully understand either distribution, exchange, or 
simple production, considered as results of individual economic effort, 
until we get firm hold of the truth that these are not three separate pro- 
cesses, but only three developments of one process, in which distribution 
cannot be separated from exchange and sim^jle production, or exchange 
from that production of utility by labour which it presupposes. The tra- 
ditional iDartition of economic science into departments of production, 
exchange, distribution, and so forth, not only does not correspond to the 
objective fact ; it misrepresents the objective fact. 

— Franklin H. Giddings (America), Sociology and Political Economy, 
Publications Am. Ec. Ass., "V"oL III. No. 1. 

People fail to see that the fact of there being so many men in the 
world who have so small a share of wealth does not spring merely from 
the unfair distribution of this wealth ; the chief reason is that there is 
not enough of it. The gravity of the problem does not arise so much 
from the unequal distribution of goods — for that might be fairly easily 
overcome — as from their insufficiency. 

The enunciation of the fact leads to this : "Whatever mode of distribu- 
tion may be proposed, it should always be subordinate to the mode of 
production ; however conformable the plan might otherwise be to the 
ideal of distributive justice, it should be sternly rejected if it might lead 
to a diminution of production. Otherwise the attempt at cure would 
aggravate the disease. The sine qua non is "not to discourage produc- 
tive activity." On this reef we shall find that all the socialist systems 
founder. — Gide, Political Economy, p. 408. 



WAGES, PROFITS, AND DISTRIBUTION 167 

Is, then, the demand for capital likely to balance this increase in sup- 
ply ? On the whole, it seems to me most probable that this will not be 
the case, for the non-industrial demand for the savings of individuals — 
chiefly for warlike purposes — which so markedly characterizes the 
century that has just elapsed, can hardly be regarded as likely to be a 
normal incident of the preponderantly industrial period of civilized history 
which seems to lie before us ; and though hitherto, no doubt, industrial 
improvement has been accompanied by an increase on the whole in the 
industrial demand for capital, I do not see — as I have before said — why 
this sliould always be the case. Some recent inventions have tended im- 
portantly to diminish the demand for capital : e.g. the use of the tele- 
graph by traders has tended to reduce the amount of goods that it was 
necessary to keep in stock, for the most economical performance of the 
functions of trade : and it seems quite within the limits of probability 
that the inventions of the future may have this effect to a greater extent. 
On the whole, therefore, I should be disposed to conjecture that this de- 
mand for capital will not increase so as to balance the increasing supply, 
and that therefore the rate of interest will slowly decline. I should 
expect the decline to be slow, owing to the check that the fall will give to 
accumulation ; but I see no reason for placing a definite limit to it. I do 
not see why it should not go on till the interest on capital not employed 
by its owner does not amount to more than a fair insurance against risk, 
so that the desire of obtaining interest ceases to be an important motive 
for accumulation : — though there is no reason to think that this limit 
will be reached until after a very long interval. 

— SiDGwiCK, Frinciples, p. 383. 



CHAPTER XI 
MINOE MARKET MOVEMENTS 

132. We are not yet prepared to consider questions of cur- 
rency and the fluctuations in prices related thereto. So far in 
our investigations, possible disturbances from currency sources 
have been assumed as safely to be disregarded. This course 
must still for a time be pursued. At present, we need go no 
further into currency questions than to assume price to be the 
measure in money of value. 

Already in developing the theory of value and the notion of 
normal value, there has been rendered unnecessary in consid- 
erable part any special treatment of market values and market 
prices. There is, however, one case of permanent tendency in 
price to which only casual attention has been drawn ; this is 
the tendency usually expressed as the law of increasing returns. 

In a sparsely settled country enterprise will commonly be 
found to busy itself for the most part with the extractive 
The law of industries, since these are the industries which, 

increasing for the time, offer the highest remuneration and 

returns. require the smallest outlay of capital. But these 

are the industries to which the law of diminishing returns 
applies. As population increases, this law tends to become 
increasingly manifest, and the advantages of extractive indus- 
tries correspondingly less. On the other hand, as population 
and capital increase, the relative disadvantages of manufactur- 
ing and kindred industries decrease. Manufacturing industries 
soon obtain foothold ; nor is this entirely due to the tendency 
toward diminishing returns in extractive industries ; it is in 
part due, also, to the tendency toward increasing returns mani- 
fested in other industries. It is easier to make ten hats after 
one pattern than to make ten different patterns of hats. This 

168 



MINOR MARKET MOVEMENTS 169 

is true even witli the methods of hand industry, — and more 
noticeably true in more liighly developed conditions. The 
larger the market, the greater the possible economies in pro- 
duction; the more extended the division of labour, the more 
marked the advantages to be derived from machinery, and the 
more important the economies possible in the use of capital. 
Every improvement in transportation, which enables a larger 
number of customers to be served from one centre of supply, 
renders possible larger economies of production at this centre. 
An increase in population acts in a parallel manner. So mani- 
fest is this tendency toward diminished proportional expense 
in manufacturing industries, that it is rarely overcome by the 
tendency toward advancing expense characteristic of raw mate- 
rials, excepting in cases where the manufacturing processes have 
comparatively a small part in the value of the finished product. 
It is not clear that, as usually stated, the tendency toward 
increasing returns deserves to be termed a law. The economies 
possible from larger markets and increased divi- 
sion of labour give no indication of being inex- ?^ ^^^'^^ ^^^^ ^ 
haustible. But the tendency toward increased 
productiveness, through the development of man in tastes and 
desires, as well as in the science and technique of industry, is 
seemingly persistent. On this side, only, the law of increasing 
returns is open to no question. 

Suggestive Questions 

Why have cities grown so rapidly within the last fifty years ? 

What kinds of business centre in cities ? 

Do improvements in agriculture tend rather to the increase of the rural 
or of the urban population ? 

Is the great growth of cities peculiar to the United States ? 

Are there proportionally more or fewer people employed in agriculture 
now than fifty years ago ? Why ? 

Is this growth of cities likely to continue ? 

What effect will improvements in transportation have ? Improvements 
in machinery ? 

What effect from improved suburban transportation on the density of 
cities ? 



170 OUTLINES OF ECONOMIC THEORY 

On health ? Vice ? Population ? 

What effect may the electric motor as power have on the large factory- 
system ? 

In what degree ? 

Why do city debts increase so rapidly ? In what degree is this justi- 
fiable ? 

What has your city to show for its indebtedness ? 

Ought cities to own their gas, water, and electric light plants ? 

Is the price at which the services are rendered a fair test ? Why not ? 

Does the city plant pay taxes ? interest ? rent ? full cost of manage- 
ment ? 

Does it have to advertise ? fight competitors ? 

Does it make profits ? Is it expected to pay dividends ? 

Discuss the relative merits of the following methods of treating these 
questions : By city operation ; by city ownership, and leasing under com- 
petitive bids ; by progressive taxation on profits ; by some combination of 
these methods. 

Which manner would probably tend least to corrupt city politics ? 

Is the modern city a purely governmental body or in large degree a 
business corporation ? 

NOTES 

It is easier for a dense than for a sparse population to have good roads, 
good streets, beautiful avenues, large theatres and good actors, a water 
service, cheap lighting, and as well literary and scientific libraries, thor- 
ough and general education, and a public opinion which restrains by the 
general sentiment of social interest the excesses of individual interest. 
— Couecelle-Seneuil, Traite cle VEc. Pol., p. 176. 

A working man who is well versed in political economy once told me 
that the reading of Ricardo ha,d convinced him that there is no hope for 
the labouring class under the existing system of industry. Competition, 
as he was compelled to think, must sooner or later reduce workmen to 
the starvation limit and keep them there. In times of exceptional dis- 
tress, it must drive them below that limit, and only restore them to it 
through the lessening of their number by actual death. His hopes for 
the future of his class were founded on a change in the industrial system, 
which should substitute cooperation for competition. This man is repre- 
sentative ; his premises are those of Ricardo, and his school and his con- 
clusions are those to which many readers are forced. This fact explains 
the popularity of orthodox economic literature among declared socialists. 
It prepares the soil for revolutionary seed. A demonstration of the hope- 
lessness of the old economic system is, to a man who retains his natural 



MINOR MARKET MOVEMENTS 171 

optimism, equivalent to a proof that a new system is coming. ... If 
the law of diminishing returns in agriculture were admitted, it would be 
necessary to accept the conclusion that crude nutriment will become cost- 
lier as population increases. It would then be of importance to note that 
there is a class not noticed in the traditional theory in the case of which 
the reverse of the above law is true. Commodities consisting mainly of 
form utilities are unquestionably becoming cheaper ; and among these are 
all products which minister to intellectual, sesthetic, and spiritual wants. If 
the conditions of the future were to involve plainer living, they would at 
least be more favourable to high thinking ; and we might welcome a ten- 
dency which would make it necessary for men to forego some of the 
sensuous enjoyments of life, if it, at the same time, enriched them in in- 
telligence, refinement, and moral character. If the man of the future is 
to be wiser and better than the man of to-day, we need not be troubled 
with the question whether he will or will not be happier. We do not 
admit, however, that the spiritual gain is to be purchased by physical sacri- 
fice. The world is, in fact, becoming more tolerable to man as an animal, 
and it is becoming indefinitely more favourable to him as a rational being. 

— Clark, Phil, of Wealth, p. 149. 

A sudden increase in the demand for anything will raise its market 
price ; but whether the permanent effect of an increase of normal demand 
for it will be to raise or lower its price depends on whether it obeys the 
law of diminishing or increasing return. ... In other words, we say 
broadly that while the part which nature plays in production conforms to 
the law of diminishing return, the part which man plays conforms to 
the law of increasing return, which may be stated thus : An increase 
of capital and labour leads generally to an improved organization ; and 
therefore, in those industries which are not engaged in raising raw prod- 
uce it generally gives a return increased more than in proportion ; and 
further, this improved organization tends to diminish or even override any 
increased resistance which nature may offer to raising increased amounts 
of raw produce. — Marshall, Ec. of Ind., p. 216. 



RETAIL PRICES 



133. There are minor and temporary fluctuations of market 
price about normal price which require atten- ignorance and 
tion. A]nong the most noticeable are the indefi- carelessness of 

.. T -J.!?- 1 j_-x-xj-i retail purchasers. 

niteness and variety oi price characteristic oi the 

retail trade. Buyers and sellers in the wholesale markets deal 



172 OUTLINES OF ECONOMIC THEORY 

in large quantities, have large interests at stake, and are by 
training and information well able to follow their respective 
lines of interest ; competition is close and approximately per- 
fect. But in the retail trade purchasers are, to a large extent, 
ignorant of prices and qualities, and to a large degree not 
interested to learn. The immediate subject of bargain is 
seldom of great importance to the purchaser as compared 
with the annoyance of further seeking ; and in the confu- 
sion of makers and brands he knows himself to be at 
best largely dependent on the good faith of the seller. Con- 
siderations of acquaintance, habit, credit, and fashion enter. 
Social distinction, for example, may depend in 
some measure on buying goods at X's shop at 
exorbitant prices. Stated shortly, competition is imperfect in 
retail trade ; exalted retail prices, bearing unfavourably upon 
consumers, and a multiplicity of dealers far beyond the social 
need, are common results. 

A second cause of departure of market price from normal 

price is to be found in the impossibility, in many cases, of 

a quick adjustment of supply to demand, on 

inertiao capital ^^Yiev terms than a considerable change in 

and labour. =3 

price. Agricultural products furnish the best 
examples. The svipply is produced periodically. Shortage 
can be remedied, in some measure, by the substitution of 
other commodities, and by importation from other markets; 
but a new supply is possible only after the expiration of 
considerable time. 

Some cases of variation from normal price and some 
cases of long-continued departure therefrom are to be ex- 
plained, as we have seen, by the inertia of labour — the 
indisposition of labourers, or their inability through lack of 
information or otherwise, to move about from place to place. 
There is also an inertia of capital. The time necessary for 
placing capital, the difficulties incident to moving it, the 
frequent impossibility of employing fixed capital for other 
than th6 purposes originally in view, and the certain loss in- 
curred in stopping business, all explain the tendency of any 



MINOR MARKET MOVEMENTS 173 

deviation from tlie market price to continue over a consider- 
able period of time. This tendency is, of course, in consider- 
able measure limited by modifications of supply due to the 
influence of outside markets. 



SPECULATION 



134. The question of risk lies at the very heart of the sub- 
ject of speculation. In many cases risk is best conceived as 

part of the cost of doing business, or as a tax „. , . 

^ . Risk in some 

imposed upon trade and commerce. This has cases part of 
already been pointed out as related to interest ; outlay m produc- 
it is equally true with reference to all the proc- 
esses of producing and marketing goods. Farmers must, in 
the long average, obtain a price vipon their products sufficient 
to compensate them for the crops which they do not harvest. 
The non-harvested crops make part of the expense of the har- 
vested. So the bad debts of the wholesaler or of the retailer 
are a part of the expense of getting goods into the hands of 
the paying customer. The analogy to the case of transporta- 
tion charges is close. 

But what of the risk to which the wholesaler is subject 
, when he buys his supplies, that prices will fall, or what of his 
hope that prices may rise ? How about a gain in jjj ^^^^j. ^^^^^ 
this sort if he makes it ? Is it profit ? Or, how difficult to 
about the loss when loss befalls ? Is the gain *^ ^^^^ ^' 
more than compensation for risk? Is the loss the business 
equivalent of the gain which was equally in prospect when the 
purchase was made ? Has the insurer lost merely because his 
property did not burn ? or had his property burned could the 
insurance company rightly have called it a loss ? Answers to 
these questions fit awkwardly into the nomenclature of polit- 
ical economy. Possibly the term " profits " should be enlarged 
to include returns on risk. If so, profit becomes something 
wider than a theoretical equivalent for wages, — a form of 
compensation for the human element in production. Or, pos- 



I74 OUTLINES OF ECONOMIC THEORY 

sibly, it would be well to construct a new term, " risk-profit/' 
to cover this class of cases. 

At any rate, one who buys goods or land buys at a price 
which different estimates of future developments have helped 
to fix. Whoever wins, wins because his judgment, or his guess, 
or his luck, was superior; loss comes by reverse title. In 
either case the gain or loss has no relation to any productive 
purpose on the part of the speculator. 

135. We say that in purpose there is nothing 
speculation^ ° productive in speculation. Is it productive in ef- 
fect, and, if so, in what cases and in what degree ? 

Utilities, as we know, are never absolute, — but ai-e relative 
to human needs, and rest in their very nature upon ques- 
tions of place and time. Ice, in summer, has gained a time 
utility ; so of apples or potatoes in winter. The surplus from 
to-day's banquet may possibly shield you from starvation 
to-morrow. Here is room for productiveness in some sorts of 
speculation. 

I find no clearer or more accurate discussion than that of 
Cairnes, of which the following is, for the most part, either 
quotation or abridgment : " It can be shown that there is in 
every market a price at which it is desirable that the com- 
modity, whatever it is, should sell at that time and place, — 
desirable ultimately in the interests of consumers, but in a 
certain sense desirable, also, in the interests of dealers, — tak- 
ing buyers and sellers together, — and which the combined 
operations of both, so far as they are well informed respect- 
ing the conditions of supply and demand, tend to establish." 
(Leading Principles, pp. 107-110.) 

An undue fall will, on account of increased consumption, be 
compensated by a corresponding rise, to the loss of the dealers 
who sold while the lower price prevailed; and an undue rise, 
by checked consumption and a corresponding fall, to the loss 
of all dealers who purchased at the higher rate. '•' It is to the 
interest of both buyer and seller to know the point beyond 
which in one direction the buyer, and in the other the seller, 
cannot pass without loss ; and this is precisely the point which 



MINOK MARKET MOVEMENTS 175 

stauds identified with the consumer's interest." For, in order 
tliat the entire supply shall furnish the maximum of utility, 
there must be avoided, not only temporarily large consumption 
and a low average of utility, but also that condition of scarcity 
which results in a high average utility and greatly diminished 
consumption. One apple per day for thirty days will afford 
greater service than thirty all in one day. It follows that 
"such oscillations are at variance with the interest of con- 
sumers," and the price, therefore, which renders them unnec- 
essary, which is just sufficient and no more than sufficient to 
carry the existing supply over, "with such a surplus as cir- 
cumstances may render advisable to meet the supply forth- 
coming," we may conveniently term the " proper price," a price 
which adjusts in the most advantageous way the existing sup- 
ply to the existing demand, pending the coming forward of 
fresh supplies from the sources of production. 

A speculative restriction of consumption is also desirable 
against the possibility of shortage in the new supply. 

The services to society of speculation and of the speculative 
features in ordinary business are thus evident: "A service 
which has been well compared by Archbishop Whately to 
that rendered by the captain of a ship, who, taking account of 
the stock of provisions at his disposal and the length of his 
intended voyage, adjusts to these conditions the rations of his 
crew." These speculative adjustments, by which an immediate 
surplus can be withdrawn from the market with a view to 
future consumption, or a future supply rendered immediately 
available to consumers, are made by men who set themselves 
for personal gain to the study of market conditions, and whose 
forecasts, as expressed in market prices, while doubtless liable 
to considerable error, are of immeasurable value to society as 
a whole. Famines are thereby greatly mitigated in intensity, 
and future plenty made to lend itself to present comfort. The 
lack of effective machinery of this kind is theoretically one of 
the weak points of socialism. (But see Section 239.) 

136. But Cairnes' view of speculation seems to assume for 
all cases the necessary coincidence of speculators' interests 



176 OUTLINES OF ECONOMIC THEORY 

with social interests. Mill, in fact, says "that the interests 

of the speculators as a body coincide with the interests of 

the public ; they can only fail to serve the pub- 

TtiG Gvils 

lie interests in proportion as they miss their 
own." While this is true of speculation against an approach- 
ing food shortage, it certainly is not true in all cases or with 
reference to all kinds of speculation. It is not true, for ex- 
ample, of land, upon the price of which specu- 
lation can have no desirable influence. In this 
case, as well as in case of some other commodities, erroneous 
or extensive speculative operations are often productive of 
widespread and severe business disturbances. In many cases 
the speculator foresees permanent changes in values, and profits 
by them. Profits of this kind are made at the expense of the 
public ; no corresponding social advantage exists in economiz- 
ing supplies, nor any considerable advantage in rendering the 
advance less abrupt. Nor is there any social advantage in the 
fluctuations of prices caused by false reports or by " bearing " 
or " bulling " the market through the influence upon an igno- 
rant public of the example of the speculators themselves, by 
which later the speculators step forward to profit. 

Nor, as regards those commodities like food products, where, 
if half the supply is destroyed, the aggregate selling price may 
be doubled, is there room for doubt that specu- 
lation may result most injuriously to the public, 
by precisely reversing the beneficial action of speculation, as 
previously outlined. So far as the effects of the successful 
corner extend beyond the gains and losses of speculative opera- 
tors and touch the interests of consumers, it is by raising the 
price for immediate consumption, whereby the total of current 
consumption is diminished and a later increased consumption 
is made to follow at a low average of utility. 

But whatever may be relatively the good and 
The ultimate , •' "^ ^ 

incidence of evil in speculation, and to whatever degree specu- 

specuiators' lators may in particular cases profit from each 

other, it is evident that in the end the consum- 
ing public pays in larger part the profits of speculators as of 



MINOR MARKET MOVEMENTS 177 

middlemen generally ; since, however unfavourably specula- 
tion may in some cases affect producers, it is evident that the 
producers must in the average obtain ^ remunerations equal 
to those obtainable by them in other branches of industry. 

There is, however, here also a theoretical question similar to 
that suggested by the relations of risk to interest. Specula- 
tors' profits are an .intermediate quantity between producers' 
and consumers', a kind of charge upon trade. The distribution 
of this charge will be considered under the head of taxation. 



NOTES 

The highest kind of business talent is shown in forecasting rightly all 
these various changes, and continually adapting supply to demand ; but 
the forecast tends to become more difficult as the range of cooperation 
through exchange extends. Producers are more and more led to manu- 
facture for markets too numerous to watch carefully, too remote to under- 
stand adequately, and exposed to modifying influences of continually 
increasing complexity ; and hence fluctuations in the adaptation of supply 
to demand, and the consequent fluctuations in the income of producers, 
tend to become greater and to contain a larger element of mere luck. 

— SiDGwiCK, Principles, p. 366. 

Such operations are of doubtful legitimacy, even according to the 
ordinary standard of commercial morality: since the speculators do not 
merely expect to profit by the mistakes of others, but by the mistakes 
which they have themselves intentionally caused. 

— SiDGwiCK, Principles, p. 338. 



CHAPTER XII 
INTERNATIONAL TRADE 

Make a list in writing of the different arguments in favour of protection 
■which you have heard or can suggest. 

Do you see that any one of these conflicts with another ? 

Make a like list on the free-trade side. 

Do any conflicts strike you on this side ? 

Do machines add to wages or subtract ? 

What controls wages ? 

Is it generally well or ill to lower cost of transportation ? Eor a people 
to possess fertile land ? For mineral deposits to lie near the surface ? 

What effect in these cases on wages ? 

Define cost of production. 

Separate the conditions of wealth production into two classes: (1) 
human, and (2) non-human. 

137. It was pointed out in Section 63 that division of labour 
is possible only upon condition of the possible exchange of 
Advantages of products. Each producer must provide for a 
division of considerable number of different needs. The 

labour. system of exchange renders it possible that he 

apply the productive energies in his control to some one line 
of goods, and obtain the other goods desired by him through 
the exchange of a portion of his product for these other goods. 
He foregoes (sacrifices) some of the goods possible through 
direct production, in order to obtain a greater total of satisfac- 
tions through exchange; nor is he deterred from this course 
by the fact that his productive abilities, in some or all of these 
other lines, equal or exceed the productive abilities of the pro- v 
ducers actually engaged therein, if his abilities are relatively 
more marked in some particular line. He follows the prospect 
of greatest remuneration (least sacrifice). 

17S 



INTERNATIONAL TRADE 179 

Likewise it often happens that the inhabitants of some par- 
ticular locality devote themselves, because of their peculiar apti- 
tudes, or because of advantages peculiar to their environment, 
to the production of some one line or some few lines of goods, 
and obtain their supply of other goods through exchange. One 
community is found to be engaged for the most part in mining ; 
another in agriculture ; a third in manufactures ; and a fourth 
in commerce. The deciding cause, in any of these cases, may 
be a special adaptation either of the people or of the place to 
the chosen industry, or a special lack of adaptation to any 
other industry. In short, exchange between different com- 
munities comes about for reasons parallel to those which 
induce exchange between individuals in any community. The 
need of special treatment of trade between different commu- 
nities or different countries rests upon the relatively large 
importance, in these cases, of transportation outlays, and upon 
the lack of mobility of labour and capital across long distances 
or across geographical frontiers, marking changes in language, 
customs, laws, and institutions. That England „ ^ 

^ ' ° Not absolute but 

sends cloth to France, and France wine to Eng- relative advan- 
land, does not of necessity indicate that France tages govern dj- 

. vision of labour. 

cannot produce cloth at as small an application 
of productive energies as can England, or that England can- 
not produce wine at as small an application of productive 
energies as can France ; it simply proves that wine, produced 
in France and exchanged in England for cloth, will obtain for 
the French producer more cloth than seems possible to him by 
the application of the same kind of productive energies directly 
to the production of cloth; and, similarly, that English pro- 
ducers believe they can get more wine by making cloth and 
exchanging for wine than by producing wine. It is theoret- 
ically possible that the French producer possesses, in compar- 
ison with the English producer, advantages in both lines, and 
yet, because of advantages greater in one industry than in the 
other, finds it profitable to follow only one of these industries, 
to the entire or partial exclusion of the other. 

138. The orthodox economists are accustomed to make of 



180 OUTLINES OF ECONOMIC THEORY 

some phases of international trade an exception to the appli- 
cation of the cost-of-production idea; but in our view, inter- 
national trade is a mere illustration of the doctrine of value, 
and results from the choice by each producer, in whatever 
An example of country, of the line of least sacrifice for him. 
line of least In international trade, no less than in domestic 

trade, normal values are those values indicating 
the line of least resistance for all persons producing and con- 
suming in any given market, or in trading relations therewith. 
The normal market price in each market must remunerate the 
highest continued sacrifice involved in supplying that market. 
Costs of transportation are a part of this sacrifice ; these costs 
must therefore be remunerated in the market price, and unless 
the difference between the price in the supply market and in 
the consuming market is believed to be more than sufficient to 
cover the charges for transportation, shipment will not take 
place. This statement does not, however, of necessity imply 
that this difference must exist entirely in the prices of any one 
commodity, as, for example, of the wine in the above illustra- 
tion. The difference may be, and ordinarily is, found in part 
in the prices of that commodity which serves as return cargo ; 
for example, if corn is five cents per hundred higher in London 
than in New York, and iron ten cents higher in New York 
than in London, corn may be shipped to London and iron to 
New York, even though, if the return cargo in either case were 
omitted from consideration, it would be impossible to charter 
a ship from New York to London at as low a charge as five 
cents per hundred. It is necessary only that the markets be 
so circumstanced that a profit be possible, both outward and 
homeward trips being considered. It is immaterial whether 
the exchange be conducted by one operator or by more than 
one. In the competitive adjustment of demand and supply, 
transportation services will be obtainable at a charge enabling 
both the corn and iron exchanges to be carried on remuner- 
atively. It is evident that the consumer of iron will, in the 
case assumed, reimburse the larger part of the transportation 
outlays of the entire transaction. The final incidence of these 



INTERNATIONAL TRADE 181 

outlays will vary with, variations in the market priices of the 
products involved. No definite distribution of transportation 
charges is a priori possible in any case of exchanges, in- 
ternational or other. Market conditions may be such that 
trade can take place in but one line of commodities ; in this 
case., for so long as it endures, consumers of these commodities 
will commonly bear the greater part of all transportation 
charges,, including the cost of payment, whether through 
bankers' exchanges or by shipment of coin. The incidence of 
these charges is ^jarallel to that of taxes. (See Sections 155- 
161.) 

139. It is evident that benefits are expected to accrue in 
some measure to both of the parties to international trade, but 
the relative degrees of benefit cannot be meas- Quasi-rents 
ured by the apportionment of transportation in international 
charges. As Eicardo acutely observed, " Every ^^^^' 
transaction in commerce is an independent transaction." If 
foreign purchasers find the export trade sufiicieutly profitable, 
the volume of trade will expand until, by increased marginal 
sacrifices in production or by falling prices (lowering marginal 
consumer's sacrifice), further expansion is checked ; but the 
aggregate profit to producers above the margin is a necessarily 
indefinite quantity, and the advantages to consumers measured 
by the difference between what they do pay for the foreign 
product, and what they would, if necessary, pay, are equally 
indeterminate. 

Exchanges between people of different localities, as well as 
exchanges between people of the same community, take place 
by reason of differences in the comparative sacrifices involved 
in the production of different commodities. If, for example, it 
is found in Australia that the advantages in wheat production 
are relatively greater than in the production of cloth, wheat 
will be produced to the exclusion of cloth, till the marginal 
sacrifices in wheat production reach an equality with the sac- 
rifices involved in cloth manufacturing. It is quite possible 
that the superiority in absolute productive power should be 
with Australia in respect to cloth as well as to wheat, but cloth 



182 OUTLINES OF ECONOMIC THEORY 

must continue to be imported as long as relatively greater 
remunerations are possible in wheat raising. The following 
quotation from Cairnes refers to the condition of affairs in 
Australia during the few years following the discovery of 
gold: "Australia became the importer of everything that 
from its nature admitted of being imported; and, what is 
especially to be noted, among the things thus imported were 
many which she could have produced herself at far less labour 
and abstinence than they were produced at in the countries 
from which they were brought. For example, timber was 
imported from the Baltic, although there were forests in Aus- 
tralia capable of yielding timber quite good enough at least 
for mining purposes, for which timber was mostly required. 
Butter was largely imported from Ireland, and I believe also 
from England and Holland; though the advantages possessed 
by Australia for dairy farming in her unrivalled pastures and 
abundant cattle were exceptionally great. Similarly, with un- 
limited areas of fine agricultural land, she imported nearly all 
her food ; and with the materials of leather cheaper than in 
any other part of the world, she imported all her shoes. 
What was the explanation of these facts ? In all cases one 
and the same : it was to be found in the principle of compara- 
tive cost. Australia had considerable advantages over other 
countries in respect to timber, butter, food, and shoes ; but she 
had a greater advantage still in respect to gold ; and so it be- 
came her interest to obtain the former things by means of the 
latter. I have always regarded the commercial results of the 
Australian and Californian discoveries (for things in California 
followed a very similar course) as one of the most striking 
experimental verifications which a purely abstract doctrine has 
ever received." 

140. As has been observed, international or any other divi- 
sion of labour may be determined either by special adaptation 
The inertia of °^ people or locality to some particular line or 
labour and capi- lines of production, or by lack of adaptation to 
*^^' any other. So far as special advantages attach 

for particular industries to particular localities, an interchange 



INTERNATIONAL TRADE 183 

of commodities may be expected to take place. Personal 
advantages and disadvantages are of parallel importance to 
the extent that they are permanent ; but to the extent that 
larger remunerations are possible to labour and capital through 
changes in location, the differential advantages accruing to 
labourers and capitalists on account of changes in location 
must tend to be cancelled by rearrangements. These re- 
arrangements are, however, matters of long duration. Migra- 
tions of labour and capital are of every-day occurrence, and of 
increasing importance ; yet there remains a large degree of 
immobility, depending in part upon ignorance, stupidity, or 
pure inertia, in part upon differences of laws, customs, lan- 
guages, etc., in part on the risks and inconveniences of 
change. 

There is, however, an economic aspect of the question 
which economists have largely disregarded. Not all the goods 
for which men make sacrifices are marketable commodities. A 
portion of the immobility of capital, as well as a considerable 
portion of the immobility of labour, arises from the fact that 
many men prize above high wages or high interest the estab- 
lished associations and social and family ties in which their 
lives have been cast. A change, though offering a prospect 
of higher market remunerations, involves in many cases a 
greater sacrifice in the total. Nevertheless, the remarkable 
degree in which migration is taking place, both between dif- 
ferent countries and between different portions of the same 
country, indicates the tendency of industrial advantages 
toward a level, so far as these advantages depend upon differ- 
ences of environment. Only to the extent, however, that the 
mobility of labour and capital is effective, can foreign compe- 
tition tend to injure some domestic industries otherwise than 
to the extent that it benefits others. So long as the people 
and the capital cling to established locations, the manner of 
industrial employment will not be modified, excepting to the 
extent that some competing domestic industries become rela- 
tively more remunerative than others. We may then recur to 
the proposition already stated in Section 53, that domestic and 



184 OUTLINES OF ECONOMIC THEORY 

not foreign competition is the cause of failure of particular 
industries, except in so far as the superior inducements offered 
abroad result in an outflow of labour and capital. Only to 
the extent that this outflow is more injurious to one industry 
than to another, can foreign competition tend directly to the 
prejudice of any one industry. The bearing of these propo- 
sitions upon tariff and immigration questions is evident, so far 
as such systems are intended to be permanent. For the pur- 
poses of a temporary revenue policy or of a temporary stimu- 
lative policy, much may be said from a practical point of view 
in favour of tariffs " protective " in their effects. 

Suggestive Questions 

Why does X work on hats ? Y on shoes ? Z on law ? 

Why does England produce coal and woollen cloth instead of bananas ? 
or instead of silk ? 

Would silk cost too much in England ? Why ? 

Why does America tend rather to wheat and beef than to silk or 
sugar ? 

Why must we have tariff in order to produce sugar ? 

Is it because wages are high ? 

Why are wages high ? 

Is it because wages are low " there " ? Why are they low " there " ? 

Are wages high because people consume much, or vice versa? 

Would it be well for us if our mines were deeper or our lands less 
fertile ? Would there be more work ? 

Do men lack work because there are no more desires to be satisfied? 

If we could get woollen cloth from abroad at three-fourths the price 
here, would it be well to buy it ? At one-third ? At one-tenth ? At 
nothing at all ? 

Is some one worsted in every trade ? 

Suppose foreigners should become able to undersell the British iron 
producers, what could the British iron producers do then? 

Why would they not work at wages low enough to meet the foreign 
competition ? 

Complete your list of arguments on each side, cancelling such argu- 
ments as you see to be fallacious. 

Suppose 100 units of energy to produce, in America 200 wheat or 100 
sugar — in France 100 wheat or 100 sugar. What measured in wheat is 
cost of sugar in France ? in America? Will America best buy or pro- 
duce its sugar ? 



INTERNATIONAL TRADE 185 



NOTES 

Take a man belonging to the more modest classes in society, a village 
cabinet-maker, for example, and take note of all the services which he 
renders to society and those whicli he receives ; we shall quickly be 
struck by the great and apparent disproportion. This man passes his day 
at planing lumber and at making tables and bureaus ; he bemoans his 
condition, and yet what does he, in fact, receive from society in exchange 
for his labour ? 

Every day, on awaking from sleep, he dresses. He, himself, has made 
no one of all his articles of clothing. Bu.t in order that his garments, 
simple as they are, should be at his disposition, an enormous quantity of 
labour, of industry, of transportation, of ingenious inventions, must have 
been accomplished. Americans must have produced cotton ; Indians, 
indigo ; the French, wool and linen ; the Brazilians, leather ; and all these 
materials must have been freighted to different cities, spun, woven, 
coloured, etc. 

And then he breakfasts. That he may have the bread of which he daily 
eats, lands must have been cleared, fenced, tilled, fertilized, sown ; the 
harvests must have been preserved with care from force and theft ; a 
certain degree of security must have been guarded in the midst of a 
numerous society ; the wheat must have been garnered, ground, and 
kneaded ; iron, steel, wood, and stone must have been made by human 
labour into instruments of industry ; certain men must have thereto 
applied the energies of animal life, others, the force of falling waters, etc. 
All these are things each one of which, in itself, presupposes an incalcu- 
lable quantity of labour energy thereto applied, not alone in space, but 
in time. 

No day passes when this man does not make use of some small 
quantity of sugar or of oil, and does not enjoy the help of various tools 
for his work. He will send his son to school to receive instruction, which, 
though limited, must have required researches and preceding investiga- 
tions, and knowledge astounding in extent. 

He steps from his door to find the streets paved and lighted. His 
property rights are attacked. He will find attorneys to defend his rights ; 
judges to maintain them ; officers of justice to put them into execution ; 
all of these are things which presuppose a fund of acquired knowledge. 

He enters the church. In itself it is a wondrous monument to human 
intelligence, and the book which he carries with him is yet a more 
wonderful monument. There his moral nature is developed, his intelli- 
gence strengthened, his purposes reinforced. That this should happen, 
another man must have been able to apply himself in the libraries and 



186 OUTLINES OF ECONOMIC THEORY 

the seminaries . . . and to live without the necessity of applying himself 
directly to the satisfaction of his bodily needs. 

Should our artisan desire to travel, he finds that, in order to save his 
time and spare him trouble, other men have graded and levelled the soil, 
filled valleys and made mountains low, bridged rivers and constructed 
carriages running over pavements of stone or rails of iron, and have 
tamed to the work the sti'ength of horses or of steam. . . . And that 
wliich makes this phenomenon all the more strange is that every member 
of society finds himself in the same condition. 

— Bastiat. Translated from Harmonies Economiqiies — Organisation 
NaturelU. (Euvres Choisis, Bastiat (Guillaumin), p. 211. 

Suppose the French nation to be alone in the world, or to be sur- 
rounded by impassable deserts. Some portions of its territory are very 
productive of grain, other moister districts adapted only to pasture, others 
made up of barren hillsides valuable only for vintage ; still others, more 
mountainous, productive of nothing but timber. If each one of these 
districts is shut up by itself, what must happen? It is evident that, in 
the grain district, a considerable population may maintain itself, there 
being an opportunity to fully satisfy the primary human need, — that of 
food. However, this need is not the only one ; clothing and shelter are 
essential. These inhabitants will then be compelled to apply to forestry 
and pasture and unproductive vineyards a large part of these good lands, 
a very small part of which would have sufficed through exchange to 
obtain the things which were lacking, while the remainder would have 
maintained a considerable added population. Thus this people will never 
become as numerous as if they had taken advantage of commerce ; and, 
at the same time, they must lack for many things. The same thing is 
still more true of those people who inhabit the hillsides adapted only to 
vine culture. These people, even if they possess some industries, will 
produce wine only for domestic uses, having no place in which to sell it. 
They will waste their energies in ungrateful labour in attempting to pro- 
duce upon their barren hillsides poor crops of grain, not knowing where 
to purchase it, and will want everything else. The population, even 
though agriculturists, will be small in number and poor. In the coimtry 
of lowlands and swamp, too moist for grain, too cold for rice, the case 
will be still worse. ... In the forest country, no means of living is 
found but the chase of wild animals whose skins are without value. 
Such must be the condition of France if all communication between its 
different portions were cut off, — one half savage, the other half poor. — 
Translated from Destutt de Tracy, F Esprit des Lois, Liv. XX., XXI. 

Franklin supposes a country X having three manufactures, for exam- 
ple cloth and silk and iron, drawing their s'upplies from three other coun- 



INTERNATIONAL TRADE 187 

tries, A, B, and C, and making the attempt to benefit the producers of 
cloth by increasing sales and raising prices. For this purpose fabrics 
coming from country A are prohibited. A retaliates by shutting out the 
silks from X. It follows that the silk producers complain of decreased 
trade. Thereupon X excludes the silks from country B ; B in response 
excludes the iron from the forges of X. Thereupon the proprietors of 
the forges complain of diminished trade. Thereupon X prohibits iron 
coming from C ; C in response excludes the cloth from X. What results 
in the total ? Each of these countries experiences a diminution in the 
aggregate of wealth and well-being which it can command. 



SOME CONCESSIONS 



141. It has been repeatedly emphasized as fundamental to 
all economic reasoning that needs and desires are the motive 
forces behind productive effort, that supply comes about in 
response to demand, and that demand is as inexhaustible as 
are human needs and desires. For the human race as a whole, 
production limits consumption. Wages, interest, rents, and 
profits are quantities necessarily limited by product, and as 
limited by product are mere questions of distribution inside it. 
Thus the doctrine of the early economists that no one distrib- 
utive share, as, for example, wages, can increase, unless at the 
expense of another or others, is not an accurate statement. 
The position is tenable only upon the assumption that other 
conditions remain the same. If the social production is in- 
creased, it is possible enough, indeed perhaps probable, that 
rent, wages, profits, and interest advance concurrently. 

The argument for free trade rests ultimately upon the fore- 
going principle. The desirability of international division of 
labour, as dictated by advantages of race or habitat, seems clear 
enough, when once the truth is grasped that the question is 
one merely of maximum of product. And the argument is 
even stronger than at first appears. We tend to confuse the 
question of product, which is one of utility purely, with ques- 
tion3 of value. The well-being of the world is not measured 



188 OUTLINES OF ECONOMIC THEORY 

in the values at its disposal for consumption, but in the util- 
ities. Abundance means fall in value or absence of value. 
The commodity" which by abundance in supply more than neu- 
tralizes the energy of demand, ceases to be commodity by that 
fact, falling out of the list of exchangeable products. Human 
interests, therefore, are not parallel with the maximum cre- 
ation of value, but only with the maximum creation of utility. 
Economic progress expresses itself in successive reductions of 
the sacrifices necessary to the satisfaction of desires, — in the 
approach of commodities to the margin where value disappears, 
— in short, in the cheapening of things (Section 34). If what 
we now get on terms of effort we were able to get without 
effort, all these things would be valueless, but society would 
be richer with all its energies free for new conquests of prod- 
uct. That water should become so scarce as to command a 
market price, would mean that society was not richer but poorer. 

Thus it is clear that value measures do not correctly repre- 
sent the economy of human energies worked by international 
division of labour. Product, and not price, is the ultimate fact, 
utility, and not value. 

142. But while this is unquestionably true for the human 
race as a whole, it as clearly falls short of the truth in excep- 
The monopoly tional cases of nations or individuals. (See Sec- 
principie in inter- tiou 150.) While increasing values do not of 
national trade. necessity tend toward increasing social product, 
they do unquestionably in the interests of their producers tend 
toward an increasing share of this product. In questions of 
distribution, utilities sink in importance, and values take pre- 
cedence. Thus it may become for the interest of any indi- 
vidual in a community, or for any nation in a community of 
nations, artificially to redistribute the applications of produc- 
tive energy for the purpose of reducing in certain lines what 
woiild otherwise be the commodity output. 

Nor do cases of this sort present any inconsistencies with 
the general theory of value, or call for any extensions of theory. 
On the contrary, these cases serve to bring out with helpful 
clearness the antagonism between utility and value, which is 



INTERNATIONAL TRADE 189 

fundamental to tlie very existence of value. Value is tlie 
measure of the sacrifice involved in obtaining utility. Value 
emerges in human life only where enjoyment is conditioned 
on some form of sacrifice ; where there is both debit and credit 
in the account ; where a balance is to be struck ; where the gain 
of the consumer is not gross but net. That there may be for 
humanity utility without value is but another aspect of the 
fact that things of utility may exist in superfluity, and this 
again but restates the truth that human needs and desires are 
not infinite in any particular direction. The increase in the 
utility afforded by successive increments of supply is not pro- 
portionate to the increase in supply. It thus often comes 
about that an increasing aggregate of utility is accompanied 
by a decreasing aggregate of value. When any line of com- 
modities affords its maximum of possible utility, there is no 
place for value. " Value is an expression of the niggardliness 
of nature ; of resistance to be overcome ; of the disparity be- 
tween man's desires and his opportunities ; of the necessity 
which rests upon him for sacrifice." (Section 34.) But while 
values tend to rise with_greater scarcity, the maximum aggre- 
gate of value is not found at the very extreme of scarcity, but 
at some middle point, where the tendency toward increasing 
value from scarcity is overcome by decreasing demand conse- 
quent upon higher prices. This is readily illustrated from 
market movements ; a short crop of wheat commonly sells for 
a greater price aggregate than an abundant crop.^ 

1 There is one law of prices which you must know and understand before 
you can make the least progress in interpreting the simplest problem. It is 
known to some economists, I do not say all, for it is most unaccountably neg- 
lected or obscured in most treatises on the subject, as Gregory King's law. 
We take it a defect in the harvest may raise the price of corn in the following 
proportions : — 

Defect : Above the common rate : 

1 tenth raises the price 3 tenths 

2 " " " 8 " 

3 " " " 16 " 

4 " " " 28 " 

5 " " " 45 " 

The price of any article in demand, but at present in defect, rises in price 



190 OUTLINES OF ECONOMIC THEORY 

One billion bushels of wheat at forty cents per bushel com- 
mand a lower price aggregate than eight hundred million 
bushels at sixty cents per bushel. It does not, however, follow 
that this increase may continue indefinitely with every decrease 
in the quantity of wheat for sale. The point of maximum 
price aggregate is dependent upon the volume of the demand 
for the commodity as affected by modifications in price. Food 
products furnish the best illustrations, and perhaps the only 
important ones, of increasing value aggregates following upon 
decreasing supplies. 

143. It then becomes evident that, while the general welfare 
may thereby suffer, far-sighted individual or national policy 
may dictate that course of reduction of product which mani- 
fests itself in daily affairs in what are commonly termed 
"monopoly methods." The inducements to this course are 
indeed stronger than are indicated by the foregoing analysis. 
Assuming that the billion bushels of wheat sell for four hun- 
dred million dollars, and that this covers approximately the cost 
of production, the restriction to eight himdred million bushels, 
while increasing the selling price but from four hundred million 
dollars to four hundred and eighty million, would increase the 
producers' profits not only by the eighty millions increase in 
price, but by the saving in outlay accompanying the decrease 
in output. This course would be attractive enough even on 
terms of maintaining the displaced labourers and capital in. 
idleness. But these productive energies are not lost; they 
profit the monopolistic company or nation in applications to 
other productive employments. 



by a diflferent ratio from that indicated by the ascertained amount of the 
deficiency; and e converso, the price of any article in demand, but at present 
in excess, falls in price by a different ratio from that indicated by the ascer- 
tained amount of the over-supply. The operation of the above law is always 
most dominant in articles of prime necessity, in which no notable economy 
can be made without suffering on the part of the people when supply is short, 
and no notable increase of consumption can be expected when the quantity is 
in excess of supply. If the article is relatively perishable, the phenomena 
increase in intensity on either side. 

— Thokold Rogers, Ec. Int. of Hist., p. 250. 



INTEKNATIONAL TEADE 191 

Doubtless, the practical bearing of tliese principles upon the 
tariff policy of nations is not great. It falls out rarely that 
any people possesses an industry fulfilling in how does this 
considerable degree these monopoly conditions, apply to 
But where conditions of this sort exist, if they ™^"<=^' 
ever do exist, a protective tariff may be a practicable, almost an 
ideal, method of effecting a profitable readjustment of industrial 
energies. And doubtless these conditions do occasionally exist.- 
The nitrate and guano industries in South America are prob- 
ably examples ; possibly, also, our cotton and copper interests 
may be placed within this class. With world-wide opportu- 
nities for agriculture and world-wide agricultural products, it 
is clear enough that our agricultural industries do not, for the 
most part, meet these requirements. It is, however, important 
that the case be based upon correct theory. 

But it is worthy of note in passing that while we may re- 
gard a protective tariff system as an almost ideal policy in the 
case assumed, it yet falls something short. Ex- 
port duties would operate with equal effective- ^^ttef method 
ness in foreign trade and commonly present 
fewer difficulties in practical administration. Not only this, 
but it is very possible that, under a protective tariff, profits of 
foreign trade in monopoly products should be more than coun- 
terbalanced by higher prices and wasted energies at home. 
No case of this sort could arise if the entire product of the 
industry in question were exported, or if the productive ener- 
gies set out of employment could be applied in other branches 
of industry with not greatly diminished effectiveness. If, how- 
ever, we assume 1000 units of productive energy, — say, for 
convenience, men, — to be employed in copper production with 
a daily output of 1000, of which 300 goes for export, and if we 
assume that the imposition of a tariff upon other products 
works a tweaity-five per cent reduction in output of copper and 
a thirty per cent advance in price, and that the foreign and 
domestic consumption are affected proportionately, the question 
stands as follows : Domestic consumers will suffer in opportu- 
nities for consumption a loss of 700 x .25 = 175. Over against 



192 OUTLINES OF ECONOMIC THEORY 

this, it is to be computed that the foreign export now commands 
a selling price of 225 x 1.30 = 292.5 in place of 300, and that 
250 units of production have been set free for application to 
other branches of industry. If these 250 displaced units are 
capable of producing in their new employment more than 175 
+ 7.5 = 182.5 units of value, the tariff has made for profit, — 
otherwise for loss. 

The fallacy which underlies all attempts at creation of home 
markets is indicated by this analysis, but space forbids 
elaboration. 

II 

144. The theoretical relations of import duties to the inci- 
dence of taxation require examination in this connection. 

It is commonly asserted that tariff burdens are necessarily x 
borne in the outcome by consumers. Since the tax adds itself 
Does the for- ^^ ^^^® ^^^^ ^^ production, it is therefore asserted 
eigner pay the to add itself in its entirety to the selling price. 
*^^'' That this is commonly true in a rough fashion 

may be admitted ; but that it is almost never completely true 
must also be admitted. 

A rapid survey of the phenomena of rent will afford us help- 
ful analogies. The rent-bearing capacity of any tract of land is 
measured by its differential of advantage over the lands called ^ 
marginal ; these marginal lands bear no rent ; they are lands 
barely worth cultivating at the ruling level of prices if no rent 
is paid; a fall in price would therefore work the abandonment 
of these lands and the direction into other employments of 
the capital and labour thereto applied. Better lands, however, 
will continue in cultivation as long as some part of the differ- 
ential termed rent still remains uncancelled. What lands shall > 
remain in cultivation or what be abandoned is determinad by 
the market prices obtainable for their products. 

These reasonings apply with equal force to all other lines of 
production. Market values fix in every industry both the V 
volume of demand and the volume of supply. As with agri- 
cultural products, so with all others : a rise in price does not 



INTERNATIONAL TRADE 193 

imply that the entire demand volume is retired, nor does a fall 
in price close all the avenues of supply. Normal price is that 
price which is sufficient to maintain the normal volume of 
product. Put more accurately, normal price is the price 
which barely remunerates that portion of the normal produc- 
tion carried on under the most unfavourable conditions, — a 
price which scantily compensates the marginal producer, and 
which, if lowered, will direct his productive energies to other 
employments. For all producers other than those termed mar- 
ginal there is a differential of advantage measured by the dif- 
ference between what is received and that lower price which 
might be accepted without determining the producer to a dif- 
ferent line of production. Likewise, for all purchasers other 
than marginal purchasers, there is a differential termed con- 
sumers' or purchasers' rent, — the difference between what is 
paid and that higher price which would be paid were the higher 
price imposed. Thus the distribution of any tax is determined 
by the point at which a new marginal alignment is made neces- 
sary, a new point of equation between demand and supply. 

To illustrate : let it be assumed that there are upon the 
market for sale 26 units of any given commodity, the cost 
of production of these ranging by unit stages from 75 to 
100, and that there are upon the market 26 purchasers dis- 
posed to buy each one unit of commodity, and to pay therefor, 
if necessary, prices ranging respectively from 100 to 125. 
Evidently, the price which will place demand and supply in 
equation is 100. Now, suppose a tax of 10 to be imposed. 
Assuming that the consumers must bear the entire burden, 10 
of them will be excluded from the market and 26 of com- 
modity will confront 16 of demand. If, on the contrary, 
the sellers were to bear the entire tax, the result would be 26 
of demand to 16 of supply. The point of equilibrium is then 
at 105, five producers and five consumers being excluded 
from the market. Under the conditions assumed, the tax has 
divided itself equally between producers and consumers, and 
is paid in diminution of the quantities termed producers' and 
consumers' rents. 



194 OUTLINES OF ECONOMIC THEORY 

For ordinary cases this illustration greatly exaggerates the 
facts. The rent quantities are commonly of less considerable 
magnitude. Especially is it true that in industries other than 
agriculture producers' differentials are measured by narrow 
margins. But the principle holds and is theoretically impor- 
tant as bearing upon the distribution of taxes on imports. 
Some part of the tax is always paid at the expense of the 
producer. If a wide choice of markets is open to him, he 
pays but an inappreciable portion. If the industry is agri- 
cultural, where land rents largely enter, he is more readily 
and more considerably affected. Likewise, during the time 
that capital and labour are readjusting themselves to new 
conditions and redistributing themselves in new employ- 
ments, a large tribute may be collected; and if his industry 
is one fulfilling monopoly conditions where the production 
outlays fall considerably within the market price, he may be 
made to bear permanently the entire weight of the tariff 
burden. (See Chapter XIV, Taxation.) 

Ill 

145. The argument for protection, based upon the desira- 
bility of stimulus to industries in their experimental stages, 
is not a novel one, and has long been admitted 
Tariff as tempo- . free-traders to be theoretically valid. The 

rary stimulus. -^ ^ , 

difficulties incident to providing machinery and 
plant for a new industry, to establishing sources of supply 
for raw materials, to operating the plant with labour at first 
unskilled, to organizing market connections and attracting 
consumers' demand, are so great that, though the industry 
may ultimately demonstrate its practicability and profit- 
earning capacity, it may also never requite the pioneers for 
their exceptional outlay. These original projectors have no 
monopoly of the possible success, but only of the probable 
failure. In its most important bearings the experiment is of 
social rather than of individual interest, and during the period 
of experiment society may fairly be called upon to stand be- 



INTERNATIONAL TRADE 195 

hind, in some measure at least, as guarantor. On any other 
terms it is very possible that capable projectors will not 
undertake the experiment. 

But on grounds of experience the advocates of free trade seem 
fairly to have turned the argument. To admit that the State 
may profitably interfere is far from admitting that the inter- 
ference is commonly profitable. American and European 
history unite in convicting the State of exceeding stupidity 
in selecting the experiments in which it shall cooperate, — in 
indicating that the unsuccessful experiment commonly fails of 
abandonment when abandonment is due, and that the success- 
ful experiment commonly receives greater protection in nearly 
the proportion that it ought to receive less, — in short, that the 
system inaugurated to overcome the inertia and loss incident 
to planting a new industry, inevitably develops by the dark 
ways of politics into a persistent attempt to maintain in 
existence an energy-wasting failure, or into grotesque solici- 
tude for industries grown vigorously independent. But the 
theory stands. 

IV 

146. It has been made a basis of attack upon the American 
tariff system, that the industries maintained by it are industries 
of exceptionally low wage-level, and that they are Effects on distri- 
clustered in cities notorious as centers of law- bution of popuia- 
lessness, poverty, and ignorance. The system ^°^^^ ^^^ 
with us does manifestly tend toward the increase of urban 
populations with whatever of political and social evil is asso- 
ciated therewith. This result, however, does not inhere of 
necessity in a protective system, but is due to our peculiar 
conditions. The direct effect of protection in England would 
be greatly to stimulate agricultural industries, and to relieve, 
in corresponding degree, the congested population centres. 
Nor is it true in America that the employes of the iron, 
cotton, and woollen interests are poor, unintelligent, and law- 
less, because of their employment in these industries, so much y 



196 OUTLINES OF ECONOMIC THEORY 

as that these industries require cheap labour, and this class of 
labourers supply it. 

But admittiug the evils -svhich, from the point of vieAV of 
health and morals, attach to the extension of the great manu- 
facturing industries, there are important considerations in 
favour of these tendencies, as bearing upon the domestic dis- 
tribution of the social dividend. Production may be helpfully 
viewed as a purchase, from nature, of utility at the price of 
effort. Upon the assumption of perfect competition, all pro- 
ductive energies are compensated by their full product. Em- 
ployers and workmen constitute the human element in the 
aggregate of productive energies. Any cause which makes 

\ toward increased wages must be taken to make toward in- 
creased profits, since wages and profits are but different 
aspects of remuneration for human effort. Changes in rela- 
tive compensations must direct employers into the ranks of 
labourers, or vice versa. Capital also is an indirect application 
of human energies to the purposes of production; whatever 

>v causes tend to increase the productiveness of labour, will, 
therefore, other things remaining equal, tend to the increased 
productivity of capital ; in short, Avages, interest, and profits 
tend to move in parallels. It is, therefore, not credible that 
tariff regulations should affect any one of these distributive 
shares permanently to the prejudice of another. Protection 

X will not raise profits without at the same time working to the 
advantage of wage-earners ; nor can interest be moved toward 
rise or fall without a sympathetic tendency becoming manifest 
in wages and profits. 

We must, hoAvever, face the fact that rents commonly tend 

^ toward advance from the very causes which make toward fall in 

interest, wages, and profits. This is a corollary 

Peculiar effects f^^^^^^ the agricultural law of diminishing returns, 
on rents. ° °. 

Increasing difficulty in procuring agricultural 

products means a diminishing social diAddend, — a diminishing 

wage quotient. It at the same time means the cultivation of 

^' poorer land in response to the larger demand, and, therefore, 

for landlords, an increasing differential of advantage as 



INTERNATIONAL TRADE 197 

measured from a lower margin of utility. If, then, we may 
conclude, as seemingly we may, tliat for a country circum- 
stanced as is our own, protection, as judged by the test of 
maximum value product, is a distinct loss, it may yet remain 
true that this loss is more than offset by the advantages of a 
better distribution. 

It is important to place the terms of our problem clearly 
before us ; for this purpose the illustration used by Sidgwick 
in his Principles (Book 3, c. v) will serve us as the basis 
for our necessary analysis. Sidgwick assumes a case of a 
country occupied in both agricultural and manufacturing in- 
dustries, and so thickly populated that additional agricultural 
production is impossible except at a rapidly increasing expense. 
Let it be supposed that this country, having been strictly pro- 
tected in aid of its agricultural interests, now adopts free trade. 
What, then, are the manufacturing labourers thrown out of 
work by this change to do ? Suppose the entire community 
of workers to be represented by 100, sixty of whom are em- 
ployed in agriculture, forty in manufacturing, and that the 
value product (as it would fix itself under conditions of free 
international exchange) of the sixty is seventy units, of the 
forty, thirty units. With the advent of free trade, these 
forty manufacturing producers must find employment in agri- 
culture, which, under the conditions assumed, affords a rapidly 
decreasing return. But, unless the fall in agricultural wages 
resulting from the inflow of some part of these forty labourers 
is so great as to permit the existence of the manufacturing 
industries on a free-trade schedule of wages, all the labourers 
must be employed in agriculture. Assume now that the forty 
increase in agricultural labourers results in but twenty increase 
in product, — Sidgwick would draw the following comparison : 
Under the protective system, the sixty agricultural labourers 
produce seventy units of value, while the forty labourers en- 
gaged in manufacturing produce but thirty units. This dif- 
ference in actual production, as measured upon an international 
free-trade basis of values, has by assumption been overcome 
for distribution purposes by tariff adjustments. The aggre- 



198 OUTLINES OF ECONOMIC THEORY 

gate j)roduction of the 100 labourers stands at 100 units of 
value with wages at the quotient of this value divided by 
the number of labourers. But under unrestricted world com- 
petition the manufacturing industries could not exist if wages 
stood at above -f^. Now, then, if the trade barriers are 
removed, the 100 labourers together occupied in agriculture 
produce an output of ninety. But free trade and a wage of 
TW ^^^^ iio't permit the existence of manufacturing industries. 
Sidgwick therefore argues, that in some cases protection may 
conduce to a larger aggregate both of goods and of values 
than is possible under unrestricted trade. It may rightly be 
objected that conditions of this sort rarely, if ever, exist. 
Sidgwick, indeed, remarks with characteristic fairness : " The 
fear of such a result as that just described has undeniably 
been important among the motives that have operated on the 
side of protection; I think that the claim has usually been 
without much practical justification ; but I think that it ought 
to be met, not by a fallacious general demonstration that the 
result cannot happen, but by a careful exposition of the 
reasons why it is not likely to happen in any particular case, 
to an extent that ought to influence a statesman's action." 
(Book 3, c. V.) 

But on closer examination we shall find occasion to question 
the correctness of these reasonings. Our conclusions may 
make none the less strongly in favour of protection, but they 
cannot be the same conclusions. Insufficient attention to the 
relations between wages and rent has betrayed Sidgwick into 
a fallacy. The average wages of agricultural labourers are not 
measured by the quotient obtained in dividing the entire agri- 
cultural product by the number of labourers. Increasing rents 
are the correlative of decreasing returns in agriculture. Wages 
must be determined by the rate of productivity of the last 
increment of labour applied. Thus in the case assumed by 
Sidgwick, rents would increase with a rapidity corresponding 
to the rapidity of the decrease in agricultural returns ; it is, 
therefore, misleading to compute at ninety divided by 100 the 
wage outcome of free trade in the above example. Wages in 



INTERNATIONAL TRADE 199 

agriculture must fall to the level of the last increment in pro- 
ductiveness of the new supply of labour. This is clear enough 
when one reflects that on any other terms land-owners will 
refuse to hire more labour, or, accepting the last offer of labour, 
will discharge some labourers previously employed. The la- 
bourers, then, in the foregoing problem, will not, as directed 
by wages, forsake the manufacturing for the agricultural em- 
ployments, except to the extent that the labour product in the 
new employment is greater than in the old. Whatever, then, 
should be the result upon the level of wages, it is clear that ^ 
the social dividend would be increased by the removal of trade 
restrictions. 

It is from the point of view of the distribution of the social 
dividend that the change to free trade would present undesir- 
able features. Wages may fall despite an increased social 
product if only rents sufficiently advance. It is possible, 
for example, that the forty labourers displaced by free trade 
should find employment in agriculture, the social dividend 
then rising from seventy to something over one hundred, and 
yet that the increase in product due to the last increment of 
labour should permit aTwage of but Jq^q-. 

We conclude, then, that the tendency of free trade, in a 
community whose productive advantages are mostly agricult- 
ural, must be toward an increase in rural rents and in rural , 
land values, which might well overbalance the rise, under pro- 
tection, of urban rents resulting from larger city populations. 
Where large supplies of unutilized or half-utilized land are in 
reserve, that is to say, where the law of decreasing returns is 
operative to an inappreciable degree, these theoretical reason- 
ings have no important practical bearings; and even in the 
event that conditions of the sort to make the question one of 
practical importance should exist, the rational 
remedy for the case, as indicated by correct ab^tter^remedy 
theory, would be found not in artificial readjust- 
ments of production and exchange, making inevitable a dimin- 
ished social output, but in a system of progressive land taxa- 
tion in which the increase in social product should profit society 



200- OUTLINES OF ECONOMIC THEORY 

in general rather than land-owners and landlords. Still, it is 
best first to master the theory. 



ASPECTS AND ARGUMENTS IN TARIFF QUESTION 

Infant Industry. — Correct in theory but inconsistent with permanent 
system argument ; so abused in practice as to be bad ; tends to fix 
itself permanently. 

Diversified Industries. — Our industries sufficiently diversified anyway. 
In some cases a good argument from educational point of view. For 
us real question is one of economic profit. 

Commercial Independence. — Peace and civilization furthered by interde- 
pendence. Division of labour as good for nations as for individuals. 

Tax on Foreigners. — Temporary success. Consumers finally pay most 
of the tax — commonly not quite all. See Chapter on Taxation for 
full treatment. 

To hurt Foreigners. — Trade helps both sides or there would be no trade. 

To employ Labour. — Till there are no more unsatisfied needs there will 
be employment under either system. (Under which system are tem- 
porary derangements most likely ?) 

To offset Differences in Wages. — Need of protection proves low relative 
productiveness. General level raised only by increased social prod- 
uct. Wages cannot be increased by tariff at expense of interest or 
profits. 

Ultimate Question., then, is 
Does Protection increase Social Product ? 
Is the new industry more highly value-creating than the displaced 
industry ? If so, why can it not without help pay the ruling wages ? 
Higher cost of production means merely larger displacement of 
other products. 
Protection demoralizes Politics. 

But under Monopoly Conditions protection may pay. Of one hundred 
apples better destroy fifty where fifty can be sold at three cents 
apiece than sell one hundred at one cent apiece. 
Protection may, under unusual conditions, rest as a heavy tax on for- 
eigners. 
May work beneficially to modify distribution, but taxation would be 
a less wasteful method. 



CHAPTEE XIII 
COMBINATION AND MONOPOLY 

Why do manufacturers combine ? 

Is this, in any sense, a result of competition ? 

Could railroads do business more cheaply if there were fewer of them ? 
Would they lower their charges ? Would they make as many improve- 
ments ? 

How many gas companies are there in your town or city ? Street 
railway companies ? Water companies ? 

Why not more of each ? Would it be well to have more ? Would 
such a condition be permanent ? 

Why does a short crop of wheat sell for more than an abundant crop ? 

Can a factory employing 100 men undersell one employing 50 ? How 
about 400 as against 200 ? 1600 against 800 ? 2400 against 1200 ? 6400 
against 3200 ? 26,000 against 13,000 ? Would these advantages ever be 
exhausted ? 

147. Statements of economic laws assume for the most part 
the existence of competition. Their applications are definite 
and satisfactory nearly in proportion as this assumption 
conforms to the facts. It thus comes about that any incom- 
pleteness or failure of competition is a source of confusion in 
economic reasoning; the necessary allowances are found awk- 
ward to make. It has perhaps resulted that these breaches of 
economic analogy and simplicity have come to stand with econ- 
omists in some measure of scientific and moral disfavour. 

Any scheme of social organization which should exclude all 
phases of competition would seem to involve the loss of im- 
portant advantages. Broadly defined, economic 

..... , TO • ■ Advantages of 

competition is a struggle for maximum economic competition. 

rewards (minimum sacrifice). On the part of 
producers, it is an attempt to undersell each other, — to find a 

201 



202 OUTLINES OF ECONOMIC THEORY 

profitable way of offering more for less ; on tlie part of buyers, 
it is an attempt to obtain most for least ; speaking generally, 
it is a method by which each member of society gets most from 
society by rendering largest services. In outworking, it is a 
defective but automatic method of apportioning rewards to 
services, and in a secondary way, in some sort of rough approx- 
imation, a method of apportioning compensation to sacrifice. 
The apportionment is accurate only at the margins. In the 
absence of the ingenuity which competition has stimulated, 
the economic progress achieved by the race would hardly have 
been possible. Each producer, in his attempt to economize 
productive energies, has helped society to its present measure 
of economic comfort. Competition, always gravitating toward 
normal values, serves as a permanent indicator of the point 
of seemingly most profitable adjustment for all individual 
interests. (See Section 91.) 

These advantages from competition are incontestable. No 
non-competitive scheme has yet offered an adequate substitute. 
Both for purposes of maximum production and of practicable 
distribution, competition seems to be essential. 

This may all be granted, but it falls far short of justifying 
the doctrine of the economic harmonies. (See Sections 221, 
222.) We may well believe the interests of 
Evns of competi- gQ^^g^^y f^Q \^q greatly subserved by the elastic 
energy and ingenious initiative which belong to 
individual interest, and which obtain their fullest manifesta- 
tion in the competitive system; but we are not therefore 
compelled to admit that social interests are in every case 
subserved by the fullest play of individual interests. The 
interest of each is not always parallel to the interest of all. 
Even if the interest of each were always rightly understood by 
him, it would not always conform to the public interest ; and 
if the individual not only goes wide of the social interest but 
of his own as well, there is not the less but the greater diver- 
gence between social and individual interests. 

It does not strike the individual, for example, that he is 
greatly interested not to pollute the springs and streams below 



COMBINATION AND MONOPOLY 203 

liim. He is interested that a rule should exist agaiust pollu- 
tions generally, and that other people should obey it, but not 
that he himself obey it. So, open and closed seasons for fish- 
ing and hunting are necessary for the aggregate good ; but the 
better the laws are observed by others, the greater the advan- 
tage of each from violation. The very existence of monopolies 
rests upon the fact that while a large social product is for the 
aggregate good, a restriction of product in the special line of 
each producer is often of enormous advantage to him. So, 
again, it is for the comfort of the lucky possessor of four seats 
in the passenger coach that he lounge upon them all, while 
fellow-travellers stand; something like a government is nec- 
essary here in the presence of the condtictor. Likewise it is 
well for the government, through a policeman, to stand at the 
street crossings and adjust the conflicting interests of foot- 
travellers and traf&c ; otherwise you and I could never get 
across the street. Almost all crimes against property illus- 
trate the antagonism between the individual and the general 
good. One of the aims of socialism is to escape this clash of 
interests; perhaps, however, this is just where it will fail. 
How shall any one find strenuous effort to be for his own 
interest ? If he produce twice as much, his share will be 
increased by one sixty-millionth, — no great matter. As a 
practical question, each will be interested simply that every 
one else work nimbly, while he himself takes things easily. 
It is hard, even in the small horizon of a school-room, for the 
individual to see that he must in his own interest guard the 
privileges and comforts of all. 

While it is true that in competition there are strong tenden- 
cies toward economies in production, it is equally true that in 
some cases competition brings about great wastes. While it 
often results in improvement in the quality of the product or 
in reduction of prices, in other cases it results in the waste- 
ful multiplication of retailers, in the dear cheapnesses of 
adulteration and " scamping," in the false pretences of adver- 
tising, in unjust, because imperfect, competitive divisions be- 
tween employers and employed, in bad sanitation and bad 



204 OUTLINES OF ECONOMIC THEORY 

hygiene for men and women, and in the moral, mental, and 
physical disasters of child labour. 

If the individual's understanding of his own interest con- 
formed at all times to the social interest, the need of laws would 
mostly cease. The doctrine of the economic harmonies runs 
close to anarchism. On the other hand, no purely socialistic 
scheme is justifiable, unless upon the assumption that there is 
no distinguishable and retainable balance of benefits in any of 
the tendencies of competition. 

148. But some of the tendencies of competition seem destruc- 
tive of its primary characteristics ; for, from one point of view, 
Competition combination and monopoly are mere aspects of 

sometimes competition. It is a commonplace that the ex- 

destroys itself. tension of the giant industry at the expense of 
the small is a competitive product ; so of the tendency toward 
corporate organizations, — toward trusts, pools, monopolies, and 
the other forms of organized industrial combination. But these 
secondary aspects of competition differ in the degree in which 
they retain the primary competitive characteristics. In pro- 
portion as they fail of this, they become awkward of treatment 
to the economist and perplexing to the moralist and legislator. 

There is nothing of especial seriousness in the mere organ- 
ization of industry on a large scale, though considerable is to 
be said of its benefits — and dangers. But sufficient room 
remains for the competitive feature, in the rivalries of numer- 
ous producers ; while, at the same time, organization seems 
possible to a sufficient extent to obtain all or nearly all of the 
possible economies in production. With some other of the dif- 
ferent lines of industry (for example, with transportation indus- 
tries and with industries in which expense consists largely of 
transportation outlays, as in the coal, oil, water, gas, and elec- 
tric light industries), the maximum economies in production 
seem possible only on terms of exclusion of competition. 

149. ]SJ"ow, it is evident that these resulting 
What is the economies are not the sources of any considera- 

harm ? •' 

ble evil or perplexity ; the awkwardness of the 
thing lies in the fact that, competition being excluded, it is 



COMBINATION AND MONOPOLY 205 

practically certain that society will get none of the advantages 
of these economies, but that, on the contrary, the low j)rice 
possible to the monopoly will discourage all outside competi- 
tion, and the monopoly be thereby enabled not only to reap 
the entire benefit of its possible economies, but to collect from 
society something over and above the price which would pre- 
vail under the full and wasteful action of competition. And 
not only is competition avoided by the superior advantages of 
the large combination, but it is also discouraged and destroyed 
by the method of ciit-throat competition, — the trial of finan- 
cial endurance in doing business at a loss. A discussion of 
possible remedies will come later. (Section 242.) 

150. The theory of monopoly profits is a development from 
the theory of value. The normal competitive price is the price 
remuneratory to the highest continuing sacri- 
fice in production. This price may be consider- ^ ^ theory of 
ably lower than that possibly obtainable from some 
or all consumers, were such higher price imposed. With some 
commodities, a change in price does not greatly affect the dispo- 
sition to consume. In these cases a considerable advance in 
price is possible, with no considerable reduction in sales, but 
with severe encroachment on that indefinite quantity indicated 
under the term " consumer's rent." It is the consumer's rent 
which the monopolist manipulates to appropriate. The extent 
of his operations will be limited at the outside by the point at 
which his increase in profit, by reason of increased price, ap- 
proaches an equality with his decrease in profit on account of di- 
minished sales. This adjustment is a separate problem for each 
industry ; and the danger of attracting competition may fix a 
lower limit in price than the theoretical limit above indicated. 
This monopoly principle finds frequent illustration. Fruit 
occasionally becomes so plentiful in the market as to sell for 
almost nothing. Half as much would sell for more. The price 
m.ust go so low that all of the supply can find buyers. If 
the sellers could combine, it would be to their advantage to 
withdraw a half of the supply, and, if need were, let it rot. 
Again, one could hardly give away a hundred bananas to ten 



20G OUTLINES OF ECONOMIC THEORY 

ordinary people for their own eating, yet could probably sell 
one-half or one-fourth as many at a very appreciable price. 
Not many decades ago an English company, having a monopoly 
of the spice trade, sunk a whole shipload of spices off the coast 
of England. These cases further illustrate that antagonism 
between utility and value already several times remarked. 

151. The proposition that where combination is possible 
competition is impossible, would be approximately correct if 

changed to read that to the extent that combi- 
umitsT^* ^ nation is possible competition is impossible. 

But we are unable to determine the extent to 
which methods of combination may be applied. There are 
certain industries which seem rightly termed natural monopo- 
lies. Most or all of these depend to a peculiar degree on the 
use of natural opportunities or natural forces, or are intimately 
associated with the industries of transportation. To the degree 
that the sources of supply or the number of producers is limited, 
combination becomes more feasible and more dangerous. It is 
forcibly claimed that a large proportion of all such monopolies 
are legislation-made or legislation-permitted. To what degree, 
if at all, this is true will not be here discussed. 

Those industries which manifest the tendency to increasing 
returns, offer inducements to combination to the extent only, 
that added economies are possible through constantly enlarg- 
ing organization ; further than this, combination cannot go, 
unless by force of cut-throat methods. The advantages of 
large organization in the economies of production appear to 
cease before the point of effective monopoly is reached. 

152. Some attention must be given to combinations among 
Combinations purchasers. These are commonly more subject 
among pur- to Competition and are less durable than pro- 
c asers. duccrs' Combinations ; but, in theory, the analo- 
gies are close between the two. 

We have seen that, in the long average, price cannot fall 
below the marginal producer's sacrifice ; it may remain above, 
though if perfect competition exists, this marginal sacrifice is 
to be regarded as indicating the normal price. If necessary. 



COMBINATION AND MONOPOLY 207 

a large number of producers could afford to produce and sell 
at lower than the market price. It is evident, therefore, that 
by an actual agreement or tacit understanding among the pur- 
chasers in any given market, the price paid can be to a large 
extent controlled, to the positive loss of the marginal producer, 
and to a diminution of profits for all the producers above the 
margin. The buyers' combination is an attack on producers' 
rent, parallel to the attack, through sellers' combinations, upon 
consumers' rent. It is true that this biiyers' combination must 
result in a restriction of the supply to the extent that the 
lower price discourages producers at or near the margin of 
sacrifice ; but as to producers above the margin, the opportu- 
nity will still remain to the combination buyers — so long as the 
competition of new buyers does not intervene — of appropriat- 
ing a considerable share of the producers' profits without any 
corresponding decrease in price to the consumer. Indeed, to 
the extent that the total supply in the consumers' market is 
diminished by the combination tactics of middlemen, market 
prices will tend toward advance, and a corresponding addi- 
tional profit accrue to the operators ; and if, as sometimes 
happens, these operators are at the same time in practical con- 
trol of the selling market, the diminished expense of combi- 
nation buying may be made the source of additional profit in 
combination selling. 

It is asserted that the purchase of cereal products in rural 
markets illustrates the working of buyers' combinations, and 
that the meat-packing industries of the United States illustrate 
the cumulative effects of the double combination. 

Suggestive Questions 

In what degree can the large concern outdo the smaller in economies 
of production? 

Is this equally true of the great farm or the great store ? 

Ought society to get the benefit of these economies ? 

What are the natural limits to the growth of giant industries? 

May these limits be enlarged by trusts and combinations between 
different plants? 



208 OUTLINES OF ECONOMIC THEORY 

How much has cut-throat competition to do witli this? 

In what sense do you regard the law of increasing returns as a per- 
manent fact in industry? 

How does transportation open the way to the giant industry? 

What benefits can you mention from competition? 

How are honest manufacturers driven to doubtful methods? 

Do you think it proper for the government to enforce regulations in 
regard to sanitation? child labour? adulteration? length of work day? 

Under our form of government would this fall to the separate states or 
to the general government? 

What bearing have protective tariffs on the ease of combination? 

What is the harm in combination? 

Could anything be done by taxation to obtain for society the benefit of 
cheaper processes, or to protect society from artificially high prices? 

How about the justice of the thing? 

Is it a moral wrong to attempt to wreck another's business by selling 
goods under cost? What should you say of an action for damages in 
this case? 

Do you know of any instance of cut-throat competition? Who suffer? 
Who gain? 

In case of street railways, city water works, gas works, electric light 
works, does the public suffer most from competition or from combination? 

What do you think of city operation of these industries? City owner- 
ship and leasing? City taxation? 

What effect do these industries have on city politics? What effect 
would come under city ownership? 

What effect would national railways have on politics? 

Is national ownership practicable while there is private ownership in 
land? What is the connection? 

Do the same considerations apply to the telegraph or postal service? 

To what extent do you regard railway discriminations as responsible 
for monopolies? 



TRADES-UNIONS 



In what senses are labourers' interests parallel with employers' 
interests? 

In what sense adverse? 

Is the labourers' contest a contest against capital? Is it an attempt to 
lower rates of interest? 

Can anything be done by labour unions to lower rents? 

Does the contest mostly concern wages as against interest, or wages as 
against profits? 



COMBIXATION AND MONOPOLY 209 

In what degree are profits obtained by unfair treatment of individual 
workmen — by unwliolesome or unsanitary conditions for work ? 
By labour of children and women ? 
By adulteration and lying ? 
From which of these do labourers suffer ? 
What can labour unions do in regard to each of these evils ? 

153. No attempt will be made here to discuss in full 
the practical advantages and disadvantages of 
labourers' combinations. Some ground exists 
for believing that such combinations tend, in many cases, to 
reduce the losses of friction between employers 
and employed, and to increase the productive jg^"^ union™ 
efficiency of the average labourer. So far, at 
least, as this claim is well founded, labourers through unions 
can effect a permanent rise in compensations. 

Further effects of labourers' combinations, so far as they are 
successful, must be in the line of reductions of interest upon 
capital, or of the wages of management, or must be an 
addition to the prices paid by consumers. In the long run, 
labourers in any particular industry can limit the returns on 
capital and the profits of management only to the extent that 
they reduce investment in the particular line of industry in 
which the diminution takes place, which reduction must react 
unfavourably upon the labourers to more than a counterbalanc- 
ing degree. But there is no sufficient reason for 

asserting that, if trades-unionism be general in , ^^ ^^ ^5^^ ^ 
° , ° decreased? 

industry, it may not in some degree reduce the 
proportion of interest to the whole industrial product, without 
any appreciable effect on the total productiveness of industry ; 
but any balance of effects in this direction would probably be 
inconsiderable. 

And it does not seem probable that the remunerations for 
the risks of business, or the profits of its specu- 
lative features, can be appreciably affected by ^r^i^k?"*^^^ 
labourers' combinations to the ultimate average 
advantage of the labourers. 

Labourers can, then, as a whole, in no considerable degree 



210 OUTLINES OF ECONOMIC THEORY 

profit by combination (otherwise than as combination increases 
efficiency), except to the extent that employers 

Effects on pur- ^^_^^ agriculturists are injured; nor can any 
particular class of labourers profit, except to 

the extent that other classes of labourers and employers and 

farmers are some or all of them injured. 

So far as employers' profits are made up of the proceeds of 

oppression or of unjust treatment of labourers, combinations 

may be expected to prevent in some degree 

The wages of ^j^^ employment of these methods, and to tend 
injustice. r J 

to a diminution of the profits therefrom ; but, as 

we have already seen, competition alone cancels these profits 
for the benefit of the general consuming public, leaving to the 
employer a substantial profit therefrom to the extent only that 
his abilities are especially large in this direction. So far 
also as employers' profits are derived from the 
camping. ^^^^ ^^ ^ ^^^^ product at the price of a good one, 

labourers in combination can do something for themselves and 

much for society by refusing to be made parties to this waste 

and fraud. Here is a feature of trades-unionism that deserves 

development. 

154. Several conditions are essential to any considerable 

success in labourers' combinations. The combining labourers 

must exercise substantial control of the labour 

Conditions of supplv in any particular trade : it is also essen- 
success. ^^ J J i- _ ' 

tial that the labour combination set some ettec- 

tive limit to its number, else wages must tend downward 
towards the outside level, to the extent that the supply ex- 
pands. Again, the combination must control such a monopoly 
of the requisite skill that substitutes cannot be supplied from 
other trades or from the ranks of the unemployed, to an 
extent to defeat the organized action ; and finally, the goods 
produced by the combined labourers must be of such sort that 
an advance in price will not materially reduce consumption 
or stimulate the use of substitutes. In point of fact, there 
are few industries of great importance in which there exists 
a working monopoly of skill ; and where such monopoly does 



COMBINATION AND MONOPOLY 211 

exist, the consuming public protects itself, in some measure, 
by substituted consumption, or refuses to continue consump- 
tion at appreciably advanced prices. 

Where the monopoly of skill does not exist, the difficulties 
in the way of effective combination are extreme. It is true 
that there is a kind of sympathy between trades, which in a 
considerable measure protects a labour combination from com- 
petition by workmen of other trades ; but the competition of 
the unemployed is always uncompromising. It is from this 
arsenal that the employer derives his means of defence, as well 
as in other cases his weapons of oppression. 

And it is to this problem of the unemployed that labour 
organizations must address themselves ; for that matter, it is 
around this same problem, also, that are waged most of the 
uncomfortable economic and sociological controversies of the 
present time. The topics of socialism, anarchism, crime, pros- 
titution, contagion of disease, charity administration, will sug- 
gest the bearings of the problem. 

Suggestive Questions 

If unskilled labourers all work, what determines their wages ? 

What effect from a combination which should raise the wages ? Could 
as much product be sold ? Could as many men be employed ? What 
would the out-of-works do ? 

Is combination among unskilled labourers likely to be effective in 
raising wages ? In protecting members from oppression by employers ? 

Inquire among employers, and see whether they find the labour unions 
a convenience in adjusting disputes. In avoiding disputes. 

Is combination among employers possible for regulating wages ? 
Probable ? 

Did the Chicago railroads practise it in 1894 ? 

Would travellers and shippers ultimately get a benefit from these lower 
wages ? 

Do strikes commonly succeed ? If not, does this prove the failure of 
strikes to benefit the workmen ? 

Does the armed peace of Europe tend to prevent war ? 

What do you think of government ownership of railroads from the 
wages aspect of the case ? 

Can skilled labour through combination get higher wages ? 



212 OUTLINES OF ECONOMIC THEORY 

Must there be methods of excluding competition ? 
Is this desirable ? 

If as many men work for as long a time, can wages be changed ? 
If the number of workers or the length of the day be lessened, who 
suffer ? 



NOTES 

In proportion, however, as the habits of the labourers, or the limita- 
tions of their intelligence or of their resources, operate as a bar to change 
of place or employment, the limit of the employers' possible gains through 
combination is obviously extended ; since, supposing such change ex- 
cluded, this limit would only be fixed, so far as the present supply of 
labour alone is concerned, by the amount of necessaries required to keep 
the labourers in fair working condition. — Sidgwick, Principles, p. 341. 

There is a second way in which employers' [or employes'] combinations 
react detrimentally upon wages. A curtailment of the production of a 
particular commodity means a lessened demand for labour within the 
group which produces it. A struggle between the groups to outdo each 
other in limiting production would mean, to the labourers, an effort on 
the part of each group to thrust labouring men into other groups. As 
the attempt becomes general, the result is a thrusting of labourers either 
into the reserve force of the unemployed, or into the one department in 
which combinations are impossible, namely, agriculture. The power of 
agricultural industry to absorb the working force excluded from other 
fields is becoming limited, and the army of the unemployed must receive 
an increasing proportion of them. — Clark, Phil, of Wealth, p. 146. 



CHAPTER XIV 
TAXATION 

The right of taxation has been called the essential fact of sovereignty ; 
why ? 

What was the main difficulty with the Articles of Confederation? 

What is the usual cause for revolution? How was it in American 
history ? 

Where does the food come from which the judge and the sheriff eat ? 
The wool that they wear ? Who pay for these ultimately ? 

In what sense are all taxes taxes on consumption? 

What is a tax — not in terms of money but in terms of labour or 
product ? 

Why ought a good citizen to be willing to pay taxes ? Does he get his 
money's worth? More ? Is it a good investment ? 

Do you think even a poor government better than none ? Mention 
the different ways in which the expenses of government return to us in 
services. 

Discuss as to each of these suggested ways whether the rich man is 
more benefited than the poor man. 

Ought the rich to pay more taxes than the poor ? Why? 

Should taxes be proportioned to wealth ? Suppose A's wealth to be 
in a picture gallery ; B's in unoccupied town lots ; C's in a livery stable ; 
D's in mortgages ; E's in factories ; F's in tenement houses ; should taxa- 
tion apply to all proportionately ? 

Ought taxes to be proportioned to income ? 

Should it matter that one has ten children to educate while another 
has none, or that one spends his income in charity and another in luxury 
or vice ? 

Should taxes rest especially on luxuries and vices ? 

Should taxes bear on that portion of one's income which goes into 
living expenses rather than on that which goes into savings and factories, 
or vice versa ? 

Do you regard the basis of taxation as in abilities or in benefits ? 

213 



214 OUTLINES OF ECONOMIC THEORY 

Who ultimately pays the taxes on a stock of goods ? 

On imports ? On factories ? On machines ? On mortgages ? On 
wages ? Incomes ? Laud rents ? 

Which is the better method, direct or indirect taxation? Mention 
different considerations. 

Should churches pay taxes ? Schools ? 

What moral right has society to compel the unvs illing to contribute ? 

By what sort of taxes does the city get its revenue ? The state? The 
nation ? 

Do you approve of inheritance taxes ? 

Should litigants pay all the expenses of court proceedings ? 



155. An exhaustive treatment of the problems of taxation 

belongs to the applications of economic science rather than to 

the science itself. The strictly theoretical bear- 

Generai consid- -^ .^ ^^ ^^^^ doctrines examined in the preceding 

erations. ^ -"^ ^ 

pages are, however, of considerable importance 
to the theoretical aspects of taxation. But before entering 
upon an examination of these bearings, "U'e are first concerned 
to notice that all questions of taxation are complicated in 
practice by Constant considerations of justice on the one hand, 
and of expediency on the other. Government is interested to 
obtain its necessary revenues "^^ith the least possible injustice, 
and, as well, with the least possible friction. A rude sort of 
eqtiit}^ is doubtless attainable in the imposition of taxes con- 
sistently with the collection of necessary revenues, but neither 
close adherence to any principle of taxation nor strict con- 
sistency with any sort of ethical test is to be looked for in 
actual administration. 

AVe shall, for immediate purposes, devote but small space to 
the definite moral rules proposed as guides in the imposition 
of taxes. The rule that taxation should be proportioned to 
wealth is defective unless modifications be made with refer- 
ence to the sources of wealth or to the manner of employment. 
Money at interest, lands at rent, the ownership of a home and 
of a factory plant are not all safely to be reckoned for pur- 
poses of taxation in the same category. So, taxation propor- 
tioned to total income is defective, unless examination is made 



TAXATION .215 



of the uses to which, incomes are put. Expenditures for luxu- 
rious living, for the care of children, for the creation of capi- 
tal, and for public education, are not safely included in the 
same classification. 

For similar reasons, taxes proportioned to the quantity of 
consumption are objectionable as imposing relatively greater 
hardships upon the poor than upon the rich. Taxes upon 
surplus consumption are equally objectionable, as omitting 
from consideration that relation between benefits and burdens 
which should in some, degree influence the collection of reve- 
nue. Again, taxation which apportions burdens to benefits, 
works great inequalities of sacrifice. An approximately per- 
fect system would probably differ from present systems not in 
the application of any of the proposed rules to the exclusion 
of others, but in a more rational estimate of the relative impor- 
tance of these rules. 

For immediate purposes, however, we are concerned to ex- 
amine only the ultimate incidence and secondary economic 
effects of taxation, leaving for later discussion the practical 
applications to be derived from our conclusions. 

156. In Section 64 it was stated that some form of wage 
occupation furnishes for each economic actor that marginal 
type of activity from which for him the com- 

^, p ,1 .. -, Tax shifts only 

parative profit oi any other occupation may be through changed 



measured, and to which, meeting elsewhere with relation between 

demi 
ply- 



no profit, he may betake himself. But the alter- ^™^° ^^ ^"^' 



native, if one occupation is found unsatisfactory, 
is not of necessity wage-earning ; there are many other lines 
of activity, any one of which may offer prospect of returns 
greater than the compensations possible in wage-earning ; and 
there are important differences, also, in the wages obtainable 
in different lines of wage-earning. What we are concerned to 
note is that each economic actor follows the line of seemingly 
least sacrifice, and that whether the margin of difference be- 
tween the chosen employment and some other employment be 
large or small, no change in direction of activity will be worked 
by taxation, unless the amount of the tax be sufiicient to more 



216 OUTLINES OF ECONOMIC THEORY 

than cancel this margin of difference. It is commonly stated, 
and in most respects correctly, that a tax on land rents does 
Taxes on rents ^^^ distribute itsclf in higher prices of products, 
and quasi-rents It is equally true — to the extent that taxation 
do not shift. ^^ wages or profits is taxation on that relative 

advantage of one line of employment over another which we 
have termed a quasi-rent — that such taxes do not tend to dis- 
tribute themselves. It is, then, incorrect to assert that a tax 
on commodities increases the selling price of the commodities 
by the amount of the tax. Such taxes increase prices only to 
the extent that they increase the marginal sacrifices of produc- 
tion ; they do not ordinarily work this increase to the amount 
of the entire tax. 

Suppose, for illustration, that 50 hats are offered upon the 
market, the producers' sacrifices ranging by penny stages from 
100 dowxi to 51, inclusive, and that there are 50 seekers of 
hats upon the market, disposed, if necessary, to submit to sac- 
rifices ranging by penny stages from 100 to 150, inclusive. 
Under these circumstances, prices will stand at one dollar for 
each hat. The imposition of a tax of 20 per hat will not raise 
the price from the old marginal sacrifice of 100 to 120, but 
from a new margin of 90 to 110. This results from the fact 
that, with almost all commodities, some part of the demand is 
retired by increase in price. There follows, also, a diminished 
supply through the retirement of those producers at or near 
the old margin of sacrifice. Prices adjust themselves to a 
compensation for the sacrifice at the new margin in which the 
tax necessarily finds place. 

In other words, taxes on commodities, whether collected 
from the producers or from the consumers, are commonly paid 
in part from producers' and in part from consumers' rents. 
Where any tax will ultimately rest, and in what proportions, 
is a separate question for each commodity, and must rest on 
the conditions peculiar to the demand for it and the supply of 
it. Ordinarily the tax will be divided in its incidence between 
producers and consumers, resting, however, mostly upon con- 
sumers. Under monopoly conditions, or conditions approach- 



TAXATION 217 



ing closely thereto, it is possible for the tax to rest mostly or 
entirely upon producers. (See Section 144.) 

These cases illustrate the most important principle in the 
theory of taxation ; namely, that a tax on rent of any sort can- 
not be shifted unless the tax is more than the rent, or unless 
by touching the margin where rent vanishes, a new marginal 
alignment at higher marginal sacrifice becomes necessary. 
Thus a tax on profits will remain where it is placed, to the 
extent that it is a tax on monopoly or on any sort of differen- 
tial advantage of one line of production over any other, and 
will be shifted to the extent only that these relative advantages 
are overbalanced by the imposition of the tax. If taxation 
were so levied as to bear equally upon the relative advantages 
of different lines of activity, so that no rearrangement in the 
demand and supply of commodities and therefore no change 
in value should result, no shifting of the tax burden could take 
place. What is true of profits is true of wages. Unless the 
imposition of a tax upon wage-earners should result in the 
decrease of the products produced by wage-earners, either by 
inducing a change of labourers to other lines of activity, or by 
stimulating emigration, or by causing a diminution of birth-rate, 
or by pushing some portion of them across the death-line mar- 
gin of subsistence, the tax would remain as placed. 

157. It is not entirely clear that a tax on interest would 
have either the immediate or the final effect of diminishing sav- 
ings. Certainly this diminution would not take 
place unless the net returns on loans were re- ^e^ggt" 
duced ; and even in such case, the necessity of 
larger accumulations for provident purposes might be of suffi- 
cient influence to overbalance any tendency toward lessened 
accumulations on account of lower rewards. 

But it is clear that taxes upon interest cannot affect the 
interest rate otherwise than through a change in the quantity 
of loans offered and taken. To the extent that the tax is 
shifted to borrowers, and cannot be passed along from the 
borrower to third persons, there will result a diminution of 
the borrowing demand to correspond to the raised marginal 



218 OUTLINES OF ECONOMIC THEORY 

sacrifice. To the extent that the tax remains upon the lender, 
there will be some tendency toward outflow of capital to other 
markets, and some disposition on the part of capitalists to 
utilize directly their own possessions. The new interest rate 
will mark the new point of adjustment between higher lenders' 
sacrifices and higher borrowers' sacrifices, — the point of inter- 
section of two new lines of margin. 

But it must not be assumed that because borrowers of capi- 
tal have been compelled to share with lenders some part of the 
tax burden, the portion shifted to borrowers may not in turn 
be passed along by them in some part to other members of 
society. So far as the borrowers are the ultimate consumers of 
the borrowed wealth and its resulting utilities, we shall see that 
these borrowers will be unable to shift the tax ; so far, how- 
ever, as the borrowed capital is employed in placing commodi- 
ties upon the market, a tax on interest is parallel to a tax on 
commodities, and will distribute itself in a similar manner. 

To the extent that taxes are passed along to ultimate con- 
sumers, the tax will rest with these consumers, unless the com- 
modity is one consumed in peculiarly large degree by particular 
classes of producers. In such case, the tax on the commodity 
will act as a tax on these particular branches of production, 
and will tend to work a rearrangement in the applications of 
productive energy. Such cases, however, are not common, nor 
are effects of this sort ordinarily of marked importance. 

158. Income may, in any particular case, be made up solely 
from profits and wages, or from rents, or from interest, or it 

may be the aggregate of two or more of these 
elements. If, however, an income tax is so ad- 
justed as not to modify the relative advantages of different 
forms of industry or of different lines of productive activity, 
no changes in values will follow the imposition of such a tax. 
Its burdens will not be shifted ; it will in effect bear as a direct 
tax upon the total consumption of each receiver of income. 
This is usually the case with income taxes. 

159. We have now to note that every tax at its point of 
final incidence is of necessity a tax upon consumption. Taxes 



TAXATION 219 



on incomes and taxes on profits differ in tliis regard from 

taxes on specific commodities in this only, tliat taxes on profits 

and income tend to restrict consumption gener- 

All taxes are 
ally and cannot be avoided, while taxes on spe- consumption 

cific commodities do not in material degree tend ^^^^^ 

Luxui 
vices. 



,1,1 J. • J! J.!, T Luxuries and 

to reduce the consumption oi other commodi- 
ties, and may in large degree be avoided. It is 
from this point of view that taxation of luxuries and vices 
especially recommends itself. 

Taxes upon land rents are correctly said to rest where placed. 
But this proposition must not be understood to include taxes 
upon the value of improvements or upon the rents 
derived therefrom. Nor does it include taxes '"P'""'^^™^'^ ^ 

on land. 

upon those consumable or destructible qualities 
of the soil which, under the new burden of the tax, are not 
profitably to be replaced when once consumed. A slowly 
working change in the applications of productive energies is 
certain to follow in a small degree the imposition of a land 
tax, if the tax touches land at the margin of production or 
touches improvements upon land. To this small degree the 
case is in strict parallel^with that of taxes on commodities in 
general. 

160. Finally, it must' be observed that no tax is safe from 
further shifting until it has reached the point of consumption ; 
that no tax is safe to rest in its entirety where placed, if 
by modifying the applications of productive energy it tends 
toward the disturbance of values ; that general taxes on profits, 
rents, incomes, monopolies, or wages do not in general bring 
about this disturbance, and therefore do not in material degree 
interfere with those normal divisions and applications of pro- 
ductive energy which result in the greatest aggregate creation 
of utility. Such taxes are taxes on the general consumption of 
the contributor, and leave him free to arrange his consumption 
to the greatest personal utility. Taxes on specific commodi- 
ties are in the comparison non-economic, excepting to the' ex- 
tent that the State may be expected to judge more wisely than 
the contributor as to what consumption is best for the contrib- 



220 OUTLINES OF ECONOMIC THEORY 

utor. And by this test, also, taxes on luxuries and vices are 

to be commended. 

The tendencies indicated under the laws of increasing and 

diminishing returns, have some important bear- 
Increasing and _ . 

decreasing re- ings upon taxation. The law of diminishing 
turns as related returns may be restated as a tendency towards 

to taxation. n ^T ■ -, ■ ^ 

falling prices as production decreases. Thus, a 
tax upon products falling within this law will, if it reduce the 
entire consumption, increase the market price by less than the 
amount of the tax. 

On the other hand, the tax upon the production of those 
commodities which manifest a tendency towards increasing 
returns will increase the market price by more than the amount 
of the tax ; that is to say, the marginal sacrifices of production 
irrespective of the tax will be increased. 

161. The granting of bounties is a distribution of collected 
taxes. The process is not taxation, but its reverse. Neverthe- 
less, the effects of such distribution are to be analyzed upon 
reasonings similar to those applicable to taxation. 

The necessary result of any bounty is to modify the rela- 
tive advantages of different lines of activity, and to this extent 

to compel a readiustment of values. We have 
Bounties. 

seen that the burden of taxation is not entirely 

shifted to consumers ; we shall also find that consumers are 
not able to monopolize the benefits of bounties, but must share 
them, in some measure, with producers. The hat illustration 
will again serve. If production and consumption have adjusted 
themselves at a price of 100, a bounty of 20 would admit 20 
new producers to the market, on condition that with this in- 
crease of supply prices could be sustained at 100 ; but 20 more 
consumers must be found ; these can only be found at a price of 
80. But at 90 ten more can be found, and at 90 ten more pro- 
ducers can apply themselves to the production of hats. The 
bounty of 20 will thus have lowered the price by 10, and will 
have distributed its benefits equally between producers and 
consumers. 

It is to be held in mind that, through this redistribution of 



TAXATION 221 



productive energies, there has resulted a lessened production 
of other commodities, and thereby a diminished aggregate pro- 
duction of utility. 

Suggestive Questions 

Compare the tax bill with that of the grocer. 

Ought the right to vote to depend in any way upon property or to be 
influenced by it ? 

How does taxation differ from robbery ? 

Why do anarchists object to taxation ? 

What was Rousseau's theory of the social contract ? 

Ought public funds to be used for Fourth of July celebrations ? 

What is a poll tax ? 

Are taxes better direct or indirect ? 

Is it wise to assist private educational institutions with public funds ? 

Suppose A has $100,000 all invested in real estate mortgages, upon 
how much is he taxed ? 

Can he shift this, in part, upon some one else ? 

Suppose he himself owes $10,000 to the bank ; will this be deducted 
from the amount upon which he is taxed ? Ought it ? 

Suppose you own a farm worth $5000 and owe A $4000 toward the 
purchase price ; how much are you worth ? On how much do you pay 
taxes, — $1000, $5000, $8000, or $9000 ? 

Are all who ai'e taxed citizens ? Ought all to be ? 

Are criminal courts of service to those who never have litigation ? 
How about civil courts ? 

~ What harm in taxing the grain which makes the flour ? Why better 
tax the flour ? 

Is tariff taxation sufficiently near to the point of consumption ? Is it 
economical of collection ? 

Does it place unusual premiums on dishonesty ? 

Does it bear in desirable proportions upon rich and poor ? 

On what classes does taxation on whiskey or tobacco fall ? 

Is this better than an income tax ? 

On what classes does the income tax mostly fall ? 

What should you say of the expediency of limiting taxation to two 
forms, — an income tax for the rich, a luxury and vice tax for both rich 
and poor ? 

Would you add to this a land tax, or, more properly, a rent tax ? 

Is an income tax best levied by measure of income received or of 
income expended ? 

The French assess their income tax by measure of a few leading 



222 OUTLINES OF ECONOMIC THEORY 

indicia of tlie expenses of living, — rental value of house, amount of fur- 
niture, number of servants, etc. ; V7hat do you say of this ? 

Is it true that " tariff is a tax " ? 

Is it true that the foreigner pays the import duty ? 

Do producers or consumers pay charges of transportation ? 

Do producers or consumers pay the profits of speculators ? 

Do lenders or borrovrers pay for the risk element in the loan ? Do 
consumers ultimately pay any part of this ? 

Does a tax on land by the acre fall on landlords ? Tenants ? Con- 
sumers ? 

Who would pay a percentage tax on rents ? 

On whom does a tax on residence property fall ? 

Where does a tax on a factory finally fall ? On mortgages ? On rail- 
roads ? On dividends ? On railroad stocks ? 

What do you think of a succession tax (tax on inheritances) ? 

Should taxation on incomes be progressive ? 

Should taxation on public franchises be progressive ? 

If a large amount of land were set aside for parks, etc. , what effect 
would this have on the aggregate of rents ? 

On prices of products ? 

On profits of cultivators ? 

Which would be the most considerable effect ? 

Would producers' or consumers' rents suffer the most ? 



NOTES 

Some thinkers hold seriously that the burden of taxation ought to be 
as much as possible felt by those who bear it, in order that they may have 
the strongest possible motives for minimizing it ; and perhaps in a very 
orderly and law-abiding and lightly -taxed community this might be de- 
sirable ; but in most actual societies the dangers arising from " ignorant 
impatience " of taxation are so much graver than any which " ignorant 
patience" would cause, tliat it should rather be a maxim of statesman- 
ship to avoid if possible any species of tax that is particularly disliked by 
the persons on whom it falls, even if the dislike seems groundless and 
fanciful. — Sidgwick, Principles, p. 565. 

Neither excise or customs make a substantial revenue, unless they 
attack the consumption of the poor. — Rogers, Eg. Int. of Hist., p. 464. 

A tax imposed on things that are partly esteemed as signs of wealth, 
and therefore of social status, pro tanto increases their utility in pro- 



TAXATION 223 



portion as it increases their excliange value ; so tliat tlie consumers do 
not lose what the government gains. And obviously taxes that reduce 
the consumption of commodities likely to be abused, such as alcoholic 
stimulants, tend to benefit consumers thus prevented from injuring 
themselves, and indirectly to increase production by diminishing the 
loss of efficiency caused by such production consumption. 

— SiDGwiCK, Principles, p. 580. 



CHAPTER XV 
CUERENCY 

STANDARD OF DEFERRED PAYMENTS 

162. It has already been made sufficiently clear that the 
borrowing of money is, in effect, the borrowing of the things 
„ ^.^ , ^. which money will buy. Yet, as a matter of 

Credit relations . "^ . . 

commonly fixed practice, all are familiar with the fact that when 
in terms of money is loaned the agreement commonly runs 

to pay back money. So, when property is sold 
on time, the terms ^re for payment later in money. One does 
not know what a house will be worth next year or the year 
after. At the time you sell your hay, for example, you know 
what it will exchange for of other things. If you are to be 
repaid at the end of a year, you want not an equal amount of 
hay, but an equivalent amount of purchasing power. Payment 
in hay would work out at under or over payment, accordingly 
as hay should become scarce or abundant, of high or low 
marginal utility. Yet, evidently, also, money fluctuates in 
purchasing power; that is to say, prices sometimes exhibit a 
general rise or fall. Money is, therefore, not a perfect standard 
of deferred payments, though it may seem to afford the closest 
practicable approximation thereto. 

Before proceeding to a general discussion of currency ques- 
tions, we are interested to inquire whether an ideal standard 
of deferred payments is either practically or theoretically 
possible ; and, if so, to determine what commodity or method 
would afford this standard. 

Suppose the question to arise with reference to the payment 
of a loan made forty years ago ; would the theoretically proper 

224 



CUKREaCY 225 



payment be found in a number of clays' work equal in quality 
and number to the days' work obtainable through the loaned 
money at the time the loan was made ; or in a 
quantity of satisfactions equal to the satisfac- i-oig t^"'™ ^eia- 

'■ "^ , . tions examined. 

tions obtainable through the loan at the time of 
its making; or in a sacrifice of satisfactions by the payer equal 
to the sacrifice undergone by the lender at the time of the lend- 
ing ? If we have adopted sacrifice as the basis of value, are 
we not committed to the proposition that payment should be 
made in equal labour ? 

Estimating roughly, gold will buy now twice the merchan- 
dises which an equal amount of gold would buy forty years 
ago ; it will buy only half the days' labour. To demand pay- 
ment in sufficient gold to purchase labour equal in quantity 
and quality Avould be to demand double the original amount of 
gold. The gold having per dollar double the merchandise 
purchasing power, this manner of payment would amount to 
payment in quadrupled satisfactions. 

But it is not so clear whether, in strict theory, payment 
should be by measure of equal goods or of equal sacrifices. 
Nor is this a mere play of words, though the should payment 
distinction may seem an obscure one. In an- be by utilities or 
other form, the question is whether value or ^y sacrifices? 
utility only shall be made the basis of payment. We will 
assume, for example, that the $100 borrowed was sufficient 
to procure the satisfaction during a month of all the needs and 
desires commonly satisfied at the given time by the average 
man. It is conceivable enough that by reason of human de- 
velopment, or of discoveries and inventions, all the needs at 
that time satisfied by the average man should after forty years 
be satisfied almost as freely as if by the entire bounty of nature. 
That is to say, the means of satisfaction of the desires com- 
monly satisfied at the earlier date may now bear almost no 
value. Payment in value, that is, payment measured in sacri- 
fices, would mean payment in a vastly increased sum of satis- 
factions. Payment in an equal sum of satisfactions would 
mean payment in vastly decreased sacrifices of effort. 
Q 



226 OUTLINES OF ECONOMIC THEORY 

It appears to be true that the measure of payment shoukl be 
found rather in the line of equality of utilities than of equality 
of efforts. But by the test of utilities, the problem is insolu- 
ble other than by loose approximations, since over long periods 
of time utilities offer no basis of comparison. Even were 
comparison possible, where food has remained, as in Europe, 
practically stationary in price, rents have risen and clothing 
fallen, and small luxuries and transportation have greatly fal- 
len, — yet, in view of the fact that a host of commodities of 
luxury and convenience have come to exist which were not to 
be had at any price forty years ago, the essential unfitness 
of the problem for accurate solutions becomes manifest. 

163. Yet, proceeding on the principle that an equality in 
satisfactions constitutes the ideal measure of payment, at- 
tempts have been made to outline a scheme for 

A commodity commodity payment which shall avoid the 
measure. j i. j 

fluctuations in the purchasing power of money. 

Admitting the theoretical difficulties above examined, the case 
has yet seemed manageable for general purposes. Evidently 
no one commodity will do for a measure. It has therefore 
been suggested that a general average of prices should be taken 
at the time of borrowing and at the time of payment, and a 
sum of money equivalent to the borrowed sum in power over 
the general schedule of commodities be returned to the lender. 
This plan, however, has been rightly subjected to criticism, as 
giving in the reckoning equal importance to pepper with pota- 
toes, and to mustard with meat. Only commodities in general 
use should be considered, and these should be given prominence 
as nearly as practicable in the proportions in which they are 
generally used. The outcome has been the scheme for de- 
ferred payments, called the multiple standard, — a method not 
intended to avoid the use of money as a means of payment, 
but to compute for purposes of justice the amount which, re- 
turned, would constitute a fair payment. It may be doubted 
whether the method will ever come into general use, or would 
prove entirely practicable if attempted ; but the principle on 
which it proceeds has been accepted by most economists as 



CURRENCY 227 



indicating an approximately ideal standard of deferred pay- 
ments. 

164. Some further modification seems, however, to be re- 
quired; the commodity schedules must take account of human 
services rendered directly, that is, not incorpo- 
rated in market commodities. The servant girl, f ""^^"^^^ "^^^^ 

° ' for services. 

the doctor, and the minister are important facts 
in our current expenditures. While it is true that gold com- 
mands a greatly increased sum of the commodity products of 
labour, it commands a smaller sum of labour itself. Human 
attentions, in the form of professional, artistic, or domestic ser- 
vices, have risen in value, as measured in money. Inasmuch, 
then, as every schedule of expenses is made up, in important 
degree, of outlays for singing, doctoring, teaching, and preach- 
ing, any multiple standard of deferred payments must take 
account of these items. We eat the broiling of our steak as 
truly as our steak. 

165. Enough has been said to indicate the extreme perplex- 
ity of the question and the unsatisfactory nature of any pos- 
sible solution. But there is a further element of difficulty, an 
element of great importance practically as well as theoreti- 
cally. Our standard of living has changed. With increasing 
effectiveness of labour, human needs have expanded. That 
which was once relative comfort has become pri- ^^^ ^g ^^ 
vation, — privation absolutely in view of higher changed stand- 
standards of desire, — privation relatively in view ^^ ° ^ ^' 

of higher levels of comfort or luxury in society. The causes 
which have served to make greater consumption possible, have 
themselves made greater consumption necessary. Payment in 
an equal amount of control over the objects of human desire 
is not an adequate return for the earlier sacrifices. If even 
exchange of work would be over-payment, even exchange of 
utility would be under-payment. If on the one hand expand- 
ing desires and expanding powers of satisfaction are to be 
regarded as a human gain, on the other hand the possession of 
the desires without the power of satisfaction must be counted 
for a misfortune. 



228 OUTLINES OF ECONOMIC THEORY 

A just standard of payment would require that sucli return 
be made to tlie lender as should do equal service with that 
Payment by which he parted with, and as should command 

utilities not from the borrower a deduction from his satisf ac- 

su cien . tions equal in importance to the addition obtained 

through the loan. That the creditor receive a volume of 
commodities — services included — merely equal to the vol- 
ume loaned, would be enough, were the creditor substantially 
the same creditor in needs and requirements, — if, for example, 
the advance in labour effectiveness had taken place in a night, 
immediately after the loan was made and its proceeds con- 
sumed. The borrower in such case would find it possible by 
the application of a half day's energy to repay the loan which 
had required of the creditor a full day's labour. Yet the 
lender is in as desirable a case as if the advance in labour effec- 
tiveness had not taken place. Although the debtor has freed 
himself of fifty per cent of labour through sheer delay, he may 
rightly argue that this is no injustice to the creditor. All 
humanity, creditors included, share in the good fortune of 
higher labour efficiency. Mankind is fortunate in the fact 
that the application of a day's labour produces greater ser- 
vices. They are none the less greater services. The debtor 
rightly objects to rendering to the creditor greater benefits 
than were received. The obligation of equivalent benefits is 
admitted, — it is irrelevant that the labour requirement is 
lower. The creditor's industrial effectiveness has advanced 
as has the debtor's. The creditor may replace his original in- 
vestment by one-half his original labour. A¥ere the debtor 
now insolvent, the loss could be replaced on these terms. 
Ultimately speaking, things are not useful because they cost 
effort, but the effort is put forth because the things are useful. 
It was usefulness and not effort which the debtor borrowed ; 
it was the product of effort and not effort which the creditor 
loaned. It is, then, in terms of usefulness that payment 
should be made. Labour is the producer of utility and not the 
measure of it. 

166. But it must be remembered that by this very measure 



CURRENCY 229 



of usefulness, payment must be made in something more tlian 
an equivalent command over commodities. The increased 
effectiveness of labour has brought about a higher level of 
consumption, — a raised standard of comfort and of life. This 
is a gain to such members of society as are able to attain to 
this new level ; it is the reverse to those who fall short of it. 
A new need plus the ability to satisfy the need is an advance 
in well-being; without the ability, the need is a misfortune. 
The line, then, of compensation — of equality in sacrifice — 
must be found somewhere above equality in purchasing power, 
somewhere below equality in command over human effort. 
Something must be added to payment on account of the greater 
necessities of the lender ; something, also, on account of greater 
requirements for the maintenance of social position and rela- 
tive wrell-being. The point of fair adjustment is to be found 
where the direct gain from larger satisfactions is offset by the 
disadvantage of increased requirements and decreased com- 
mand over social distinction. 

Discussion of this question cannot profitably be carried 
farther at this point. Something will be said later, under the 
topic of Fashion, w^hich may aid in estimating for theoretical 
purposes the relative importance of the two factors in this 
adjustment. Enough has already been said to indicate the 
difficulties, theoretical and practical, which lie behind the 
question of a standard of value intended to serve over wide 
intervals of space or time; enough, also, to discourage any 
disposition toward dogmatism in the premises. This discus- 
sion becomes of especial importance in what is known as the 
silver question. 

Suggestive Questions 

Have prices risen or fallen during the past twenty years? How 
about wheat? Dry goods? Meat? Machinery? Rates of transpor- 
tation? 

How about wages paid domestics? 

Has the general average of consumption risen? 

Do you think the increase of wealth in the world is a matter of con- 
gratulation iu (a) health; (&) morals; (c) intelligence; {d) content? 



.230 OUTLINES OF ECONOMIC THEORY 

How much of this increase in the value of life in (a) health ; (6) 
morals ; (c) happiness ; (d) content, has come from increase in knowledge 
rather than from increased command over wealth? 



MONEY GENERALLY 

Why is value of gold more stable than that of coal or iron? 

In what sense is the value of gold fixed by sacrifices of production? 
Is this a quick or a slow process? 

In what sense can money be consumed ? 

What do you intend to do with the next money you get? 

If a ten-dollar bill were given you on the condition that you should 
always keep it, would it be worth your while? 

If a hundred-dollar bill were given you would this increase the total 
wealth of the world? 

Would it increase your wealth? 

Suppose each man's cash were increased by one hundred dollars, 
would this increase the wealth of the world? 

If the money in the possession of each member of society were 
doubled, would this increase the wealth of any individual? 

Do you suppose that after this doubling, each dollar would buy as 
much as before? 

If there were no money, how would you go to work to buy a book? 
Would the bookseller be willing to take hay in payment? 

Why would not iron make good money? Brass? Wheat? Cattle? 
Hay? Diamonds? Tobacco? 

So far as we now see, in what important respects do gold and silver 
differ in characteristics from the above-named substances? 

Is paper money useful otherwise than as money ? 

Mention some uses for gold and silver other than as money. 

Mention some of the advantages of division of labour. 

167. That the love of money is the root of all evil expresses 
in forcible, but inaccurate fashion, a general truth in life. 

Cupidity in some of its forms is the root of end- 
evii'^°° ° ^ ^^^^ ^^^^- ^^^^ people want not money, — they 

want the things which money will buy. Only 
people with diseased brains care for money as a thing in itself. 
When we speak of the love of money, we use a sort of short- 
hand expression for the love of the things in life which are 



CURRENCY 231 



bought and sold. Money is the general form in which desires 
express themselves and temptations present themselves. The 
love of money for itself is a perversion of desire from the 
thing symbolized to the symbol. But human needs and de- 
sires are the source of all well-doing ^ually with all ill. If 
we wanted nothing, we should do nothing. The evil is in the 
improper direction and insufficient restraint of desires. 

168. The function of money is analogous to that of tools; 
we do not desire these for themselves, but for the things they 
enable us to do; we do not desire labour for 
itself, but for the things which it produces : so ^^^^ "'^ "^"f 

' o L- : money serve ? 

money is helpful because it enables us easily 
and conveniently to make exchanges of goods. Barter would 
be an inconvenient and impracticable way of carrying on 
exchanges. The advantages of currency are best illustrated 
by assuming the absence of it. Suppose that A desires to 
exchange hats for boots ; B has boots, but refuses to trade 
with A, because B himself wants not hats but flour. If it 
turns out that C, who has coats, wants neither boots nor 
hats but potatoes, the three men can do nothing with each 
other. A must hunt about until he finds some one who has 
boots and wants hats ; B, some one who has flour and wants 
boots ; C, some one who has potatoes and wants coats. And 
even if A finds a man having boots and wanting hats, it may 
be impossible to trade because of a difference in value between 
the desired quantity of boots and the desired quantity of hats. 
B and C may meet with similar difficulties. Jevons gives 
the following illustrations : '' Some years since, Mademoiselle 
Zelie, a singer of the Theatre Lyrique at Paris, made a pro- 
fessional tour round the world, and gave a concert in the 
Society Islands. In exchange for an air from Norma and a 
few other songs, she was to receive a third part of the receipts. 
When counted, her share was found to consist of three pigs, 
23 turkeys, 44 chickens, 5000 cocoanuts, besides considerable 
quantities of bananas, lemons, and oranges. At the Halle in 
Paris, as the prima donna remarked, this amount of livestock 
and vegetables might have brought 4000 francs, which would 



232 OUTLINES OF ECONOMIC THEOKY 

have been good remuneration for five songs. In the Society 
Islands, however, pieces of money were very scarce, and, as 
Mademoiselle could not consume any considerable portion of 
the receipts herself, it became necessary, in the meantime, 
to feed the pigs and poultry with the fruit. . . . When Mr. 
Wallace was travelling in the Malay Archipelago, he seems to 
have suffered rather from the scarcity than the superabun- 
dance of provisions. In his most interesting account of his 
travels, he tells us that in some of the islands where there was 
no proper currency, he could not procure supplies for dinner 
without a special bargain, and much chaffering upon each 
occasion. If a vendor of fish or other coveted eatables did 
not meet with the sort of exchange desired, he would pass on, 
and Mr. Wallace and his party had to go without their dinner. 
It therefore became very desirable to keep on hand a supply 
of articles, such as knives, pieces of cloth, arrack, or sago 
cakes to multiply the chance that one or other article would 
suit the itinerant merchant." {Money and Exclicmge, p. 1.) 

If trading were impossible, each of us would have to pro- 
duce everything which he consumed. We should be Jacks at 
all trades, masters of none. Under the opportunities of ex- 
change, individuals and nations follow the lines of their 
greatest ability and advantage, and exchange their surplus in 
product for the surplus of others. Thus the aggregate social 
product is increased, and thereby the individual share — the 
quotient — is enlarged. Currency facilitates this specializa- 
tion of labour, commonly termed division of labour, by facili- 
tating exchanges. Whenever we trade, it is because the thing 
which we get we valine more highly than the thing which we 
part with. Money, or more accurately currency, is a means 
of transportation as truly as are railroads and steamships. 

169. It is important to understand what qualities are essen- 
tial in any material used for money. Primarily the money 
commodity must be adapted to the needs of ordi- 

e necessary ^ary cash exchanges ; great purchasing power 

must be contained in small bulk ; all specimens 

must be of equal quality ; division and combination must be 



CURRENCY 233 



possible without loss of value ; the value must not be so 
great as to render the medium over minute for small transac- 
tions. Hay would be too bulky and too variable in quality ; 
diamonds too valuable, too variable, and incapable of subdi- 
vision and recombination without great loss. The pin and 
needle business would not flourish with diamonds for money. 
Any material which should answer these requirements would 
serve acceptably as a medixim of exchange, were it not for the 
fact that exchanges are sometimes a long while in completing 
themselves. When you sell your hats you may not want im- 
mediately to purchase their equivalent; possibly you do not 
yet know what you will purchase, or, if you know, you are not 
yet in want of the thing. Thus the money which you get 
must be something which will not fall in purchasing power 
by reason of chemical changes or by reason of fluctuations in 
supply. Your money is a note of demand payable by society 
in market products. Wheat and hay would deteriorate in 
quality, and are at one time in flood and at another in 
famine. 

170. Again, while not so clearly, yet ultimately as truly, 
all cases of mortgages, notes and bonds, bank deposits, and 
credits in general are protracted instances of credit is 
exchange. The wholesaler sells his groceries protracted ex- 
at three months' time. Instead of receiving his ^^^^s^- 
pay immediately in commodities or in money with which to 
buy commodities, the payment side of the trade is postponed 
for a term of months. It is important, then, that the medium 
of exchange shall be of stable character in purchasing power. 
When you loan, you really sell the right to things; when 
you are repaid, you get things in return. Thus a loan is, in 
essence, a long-time barter. When you have sold your hats, 
you allow X to take the money for which they sell. It is the 
same as if you had sold X the hats or the goods which he 
buys with the money. When he pays you, he really returns 
to you your remuneration for the hats. If the payment is a 
fair one, the money in which he pays you must not have 
gained or lost in its control over the means of satisfying 



234 OUTLINES OF ECONOMIC THEOKY 

human needs. Thus, money has to serve not only as a 
medium of quick exchanges, but as a standard of deferred 
payments ■ — a means of effecting exchanges requiring long 
periods of time for their completion. 

Gold and silver approximate most nearly of all commodities 
to these requirements. Neither is greatly subject to rust, 
decay, or chemical action. Both are absolutely uniform in 
quality wherever found, and are subject, without loss of 
value, to division and combination. Both comprise large 
value in small bulk. Not only this, but the annual product 
of each is so small in proportion to the entire supply, that 
rapid fluctuations in value from supply causes are impossible. 
An amount of water which, poured into a wash-tub, will make 
things lively, will not greatly affect the shore line of a lake. 
Small tempests work great commotions in teapots. 

Currency has, then, three distinct functions : that (1) of 
facilitating ordinary exchanges ; (2) of serving as a measure of 
value in current business ; (3) of affording a standard of de- 
ferred payments or reservoir of savings. 

171. It may be admitted that no sort of currency, as we 
know it, serves as a perfect appliance for any one of these pur- 
Fiuctuation im- poses. In the last chapter were examined the 
portant mostly in difficulties which seem to inhere in any currency 

credit relations. ■•j.ij; i .<> .• r\ t 

m its deferred-payment function. Ordinary ex- 
changes and measurings of value seem to be approximately 
well served by most forms of currency, in so far as these two 
functions do not shade off into the deferred-payment function. 
Even with a noticeably fluctuating medium, the day-to-day busi- 
ness of society could be satisfactorily performed, if it were not 
for the fact that the very necessity of following the day-to-day 
method would of itself introduce into business serious inconven- 
iences. It has already been pointed out that the man who sells 
a hat for silver is not in all cases inclined to an immediate use 
of the intermediate commodity received; and if this inter- 
mediate commodity be one of fluctuating value, the sj)eculative 
features involved in its retention may exercise an effectively 
deterrent influence upon the question of sale. If the sale of 



CURRENCY 235 



the hat is a credit sale, the features of speculation and uncer- 
tainty become still more considerable. 

It is thus evident that for cash transactions, as well as for 
transactions involving deferred payments, it is important that 
a currency shall be, as far as possible, free from liability to 
fluctuation. 

172. We have seen that the utility of currency lies, for the 
most part, in its service in facilitating exchanges ; in fact, its 
function as a standard of deferred payments is 

'- "^ Measure func- 

merely one aspect of its service as an exchange tion subordinate 
medium. Its service as a measure of value — a *° exchange 

. . function. 

common denominator tor trade — is incidental to 
its use as an exchange medium. There is, then, as truly a de- 
mand for money as for any other commodity. The demand for 
a medium of exchange is approximately measured by the vol- 
ume of exchanges to be made. We say approximately, since 
barter is always possible, though ordinarily not of considerable 
volume. 

Clearly enough there would be no necessity for money and 
no demand for it, if each of us were to produce everything that 
he consumed. It is equally obvious that divi- Demand limited 
sion of labour becomes possible only on terms of by division of 
possible exchange of product. It now becomes ^ °"' 
important to note that, population and per capita production 
remaining the same, the volume of exchanges increases as 
division of labour is more extended; that the aggregate of 
exchanges is approximately limited by the degree in which 
division of labour is extended ; and that, therefore, the ad- 
vantages of exchange are exhausted, when no further econo- 
mies in production are promised by an increased division of 
labour. 

173. But population and per capita productiveness do not 
remain stationary ; the population of the earth is rapidly in- 
creasing ; the development, also, of the sciences 

and arts, and of machinery and transportation, . ®™*'^. ^® 
not only stimulates the division of labour, the 
specialization of industry, but increases the per capita produc- 



23G OUTLINES OF ECONOMIC THEORY 

tion of commodities. The ends of the earth now trade with 
each other. 

It ought, then, to be clear that the need for currency is not 
proportionate to population alone, or to wealth, or even to per 
capita productiveness alone. It is the volume of exchanging to 
be performed which furnishes the measure of the demand for 
currency. This is largely a matter of degree of civilization 
and manner of industrial organization. In a general way, the 
per capita requirement for currency is enlarging. No amount 
can be said to be required per capita simply, but only per 
capita in view of the average productive efficiency and the 
established industrial methods. A sufficient per capita for one 
country may be entirely inadequate for another. 

174. The argument of the preceding chapter suggests that 
the sufficiency of the money supply may, however, be approxi- 
Prices test the n^ately determined by a careful examination of 
sufficiency of the tendency of prices. The value of the cur- 
®"^^ ^' rency unit, the dollar or franc or pound, is deter- 

mined by the relation between the demand for currency and the 
supply of currency. To this extent, there is nothing difficult 
or peculiar in currency principles. If the demand increases 
without correspondingly increasing supply, money rises, that is, 
prices fall. So, increases in supply tend toward higher prices, 
that is, toward depreciation in the purchasing power of the 
money unit. If the relation between demand and supply 
changes, the value of the unit changes to correspond. A per- 
manently insufficient currency is therefore an impossibility ; 
prices must fall until at the new unit value the sujjply is suffi- 
cient. So, if the currency is redundant, prices rise until the 
redundancy is cancelled. Currency is like a gas which always 
fills its receptacle. A currency out of equilibrium is always in 
process of becoming sufficient. But this process of becoming 
is rarely a comfortable one, and is always attended with injus- 
tice, and commonly with disaster, as will be more clearly seen 
in our examination of commercial crises. These fluctuations 
in prices are to be avoided if possible ; it is by this test, then, 
that the normal supply of money is best determined. A supply 



CUERENCy 237 



sufficient in kind and quantity to maintain a price equilibrium, 
services considered, would be the ideal condition for all ordi- 
nary cases. 

Suggestive Questions 

Explain analogy between exchange and transportation. 

Outline inconveniences of doing business without a medium of exchange. 

Show that a sale for money is only half of an exchange of goods. 

Show that a loan and repayment of money really equal an exchange 
of commodities. 

What forces are working to increase the demand for a circulating 
medium ? 

As far as you can see, is gold alone, or are gold and silver together, 
increasing in volume with a rapidity corresponding to the demand ? 

If not, what strikes you as a necessary result ? 

What will happen if currency is in excess ? Is insufficient ? 

Who are injured when prices rise ? 

Who when prices fall ? 



CHAPTER XVI 

VALUE OF CURRENCY — HOW FIXED 

What effect would falling prices haYS on the production of gold ? 

Would this result probably be sufficieiit fully to overcome the tendency 
toward fall in prices ? 

What effect would an increased output of gold at the mines tend to 
have ? 

Suppose the output of this year to be double that of last year, would 
this double prices ? 

Have you any gold about your person? 

Is it in the form of money ? In what forms ? 

Suppose the total supply of gold were doubled, would this double the 
amount used as money ? Why not ? 

What effect would more plentiful gold have on its use for non-currency 
purposes ? 

Would this effect be sufficient entirely to prevent a rise in prices ? 

175. Assuming, however, that the social importance of the 
currency system in its function of economizing human energies, 
not only by removing obstructions to the division of labour, 
but as well by simplifying every transaction of exchange, is 
well understood, and assuming the peculiar adaptation of silver 
and gold for these purposes to be evident, it yet remains to 
question how the value of this measure medium itself gets 
established, and gets modified after establishment. 

It is not difl&cult to see how a rise in the exchange value of 
the exchange medium is limited, if only there exist sources of 
Value when new ^^^^ supply. The rise takes place to the extent 
supply is possi- only that the marginal sacrifice in production 
^^^" becomes greater. If the amount of gold for 

which a hat will exchange is less than the amount of gold 

238 



VALUE OF CURRENCY 239 

wliicli could be produced by the "work which produced the hat, 
gold will be produced until an equilibrium is reached. The 
statement therefore holds, that the value of the circulating 
medium is fixed by the marginal cost (sacrifice) of production, if 
the medium is one the sources of supply of which are not closed. 

But it does not yet appear how such a rise takes place in 
the value of the circulating medium as to induce further pro- 
duction at higher marginal sacrifices ; nor does it yet appear 
what limit, if any, may be set to this rise if further production 
is not possible. 

ISTo especial difficulty presents itself with commodity cur- 
rency so long as the currency value does not depart appre- 
ciably from what the value of the commodity -^j^^^ causes ris° 
would be, were it not employed for exchange in value of 
purposes. Its market value, resulting from the ^°^^'y ■ 
adjustment of the demand for it, by virtue of its utility in 
consumption, to the supply of it, fixes approximately the value 
when employed for intermediate purposes. It is easy to see 
that with an increasing demand for purposes of consumption, 
any commodity, the product of an extractive industry, may be 
expected to rise in price through a rise in the marginal sac- 
rifice in production. But it is not so clear why the demand for 
any commodity for intermediate purposes should tend to raise 
the value beyond the normal value for ultimate non-intermediate 
purposes. How does commodity as currency come to be worth 
more than commodity as commodity ? How worth more for 
buying things than it is worth for use ? 

176. An examination of the sources of demand for gold 
becomes necessary. Gold serves human desires not only in 
one, but in many ways, — for ornament, and for industrial, 
scientific, medicinal, and mechanical purposes. There are few, 
if any, commodities which afford but one mode of service. 
Almost every object of value is a bundle of utilities, gener- 
ally, though not necessarily, bound together by a material 
basis. If the supply of gold were sufficiently restricted, gold 
might rise to a value corresponding to the highest utility of 
any part of it for any purpose. So, if for any reason a large 



240 OUTLINES OF ECONOMIC THEOEY 

part of the supply of gold were subtracted from the ulti- 
mate use market, gold would undergo a marked rise in 
value, still not departing from its value as registered by its 
marginal utility for iiltimate uses. But how does it come 
about that the use of currency is of such urgency or advan- 
tage to any particular individual as to effect, at an increased 
value, this withdrawal of gold from ordinary uses ? 

This difficulty will be better illustrated by supposing the 
sources of production of gold to be cut off, and by inquiring 
Suppose the what would be the possible limit, if any, to a 

supply to be cut rise in value, and whether any ground exists for 
believing that a rise in value would, of necessity, 
be limited to the highest utility of gold for non-intermediate 
purposes (ultimate uses). Eepeated experiences with paper 
currencies would seem to indicate that utility for purposes of 
consumption and utility for purposes of currency exhibit no 
necessary interrelation, and that, were the supply of gold for 
currency sufficiently limited, the exchange value of gold as 
used for currency might rise indefinitely beyond any possible 
margin of utility for ultimate uses. What, then, is the limit, 
if there is any limit ? 

177. The classic solution of this question is in substance as 

follows : Currency is of great social utility ; it is a tool in 

exchange as useful for its purpose as are any 
Usual statement. ^ ^, in-i pi- 

other 01 the tools of industry for their purposes. 

The amount of exchanging to be performed furnishes at once 

the measure of the demand for currency and the measure of 

its utility. No more is needed than enough ; prices must so 

adjust themselves that the volume of business to be transacted 

can be cared for with the existing volume of currency. The 

point of equilibrium between the demand for currency and the 

supply of it is the exchange value of currency. 

178. This is correct enough, but there seems something yet 
to be said : social utility and social demand must be translated 

into individual interests and personal demands, 

before market adjustments become intelligible. 

Social ntilities and social demands are not known in the 



VALUE OF CURRENCY 241 

markets, — "Every transaction in commerce is an independent 
transaction." 

All economic activity is directed to ultimate consumption. 
Division of labour takes place, because, for each individual, the 
greatest total, of satisfactions seems obtainable by this method. 
A produces shoes, because, by this course, he can get more 
cloth than by producing cloth. Each exchange by him of 
shoes for some other commodity affords for him, in some 
degree, that advantage commonly designated under the term 
" producer's rent." Something analogous to producer's rent is 
expected to accrue to each of the parties in any case of barter. 
Each has bought something and each sold something. Each 
has obtained something of greater utility to himself than that 
which he has parted with, and something which, if produced 
by himself, would have required from him greater sacrifice. 

When a trade does not take place, it is because, for one or 
both of the parties, the utility of that which is offered is be- 
lieved to be less than the utility of that which is in hand. If 
A, for what he possesses, refuses all offers of trade, it is be- 
cause, to his notion, that which he has surpasses in utility 
anything offered for it. 

179. The strenuous demand for currency, therefore, finds 
its explanation — its motive — in the rent elements hidden in 
every transaction of trade. The currency re- 
ceived will buy for the seller that which is of J^TforcT*' ^'' 
greater utility to him than the property sold. 

When the volume of currency is insufficient for the needs of 
business, unless on terms of lower prices, these producers' and 
consumers' rents are the force which pushes money values up, 
— that is, prices down. There is no limit to the possible rise 
in the value of money excepting at the point of equilibrium, 
wherever found, between the volume of exchanges seeking 
fulfilment and the volume of currency. The rapidity of 
fluctuation, whether in rise or fall, is mostly unimportant, 
unless it becomes so marked as to cancel in considerable 
degree these rent quantities. 

180. The process of market adjustment by which these 



242 OUTLmES OF ECONOMIC THEOEY 

fluctuations take place is as follows : Assume a certain number 

of currency units with an established purchasing power for 

each unit. A, whose only possessions for sale 

The mode of consist of shoes, can acquire currency only to the 

adjustment. ' ^ . . 

extent that he sells shoes. If he obtain in any 
way more of these currency units than he is disposed to retain 
for purposes of later use, he becomes an offerer of currency on 
the market. His offer is the indication of his desire for com- 
modities in place of currency. If, at the same time, the 
volume of currency in the hands of other men generally is 
also greater, in view of the purchasing power of the unit, than 
is their need or disposition to hold, the offers of commodities 
will be insufficient to absorb, at the current purchasing power 
of the unit, the currency offered. A, or some man in a similar 
case, will be able to obtain commodities only on terms of mak- 
ing concessions. The purchasing power of the unit will then 
tend toward fall, until an equilibrium is established between 
offered currency and offered commodities. If, on the other 
hand, the offerings of commodities are such, compared with 
the currency seeking investment in commodities, that conces- 
sions by commodity possessors are necessary in order to effect 
exchanges, the purchasing power of the currency unit will tend 
toward rise. If sources of currency supply are open, this rise 
will tend to induce an increased production of the currency 
commodity. If there are no available sources of supply, the 
rise will continue till, partly by the increase in the exchange 
value of the unit and partly by decrease in the number of the 
units withheld for future purposes from the market, — each 
separate unit having acquired a higher purchasing power, — 
the volume of currency becomes sufficient for the volume of 
exchanges. 

We should, then, expect it to be true that times of unusual 
financial stringency and falling prices are for the industries of 
precious metal production times of unusual prosperity. That 
the facts lend support to theory may be seen from the sta- 
tistics of gold production beginning with 1888 and covering 
the panic years up to 1895. 



VALUE OF CURRENCY 243 

1888 110 millions of dollars. 1892 ... 146 millions of dollars. 

1889.... 123 " " 1893.... 157 " " 

1890.... 120 " " 1894..., 172 " " 

1891.... 131 " " 1895.... 200 " " 

Discoveries of new fields — e.g. in Sonth Africa — have co- 
operated in this increase. 

181. Tliere is a further fact v^hich adds to the intensity of 
the rent motive behind the demand for currency. Currency is 
the most exchangeable, the most generally de- 
sired, of all commodities. For this reason one ^'^^''Pt^oi 
dollar of it is commonly more desirable than one 

dollar's worth of any one of all the commodities for which 
it can be exchanged. This is because the receiver of cur- 
rency has commonly no definite idea of the thing in kind or 
quantity into which he will ultimately convert his currency ; 
his number of different options is, in itself, an element of 
desirability. 

The importance of this option feature is generally not suffi- 
ciently recognized. Currency is received in its aspect of gen- 
eral purchasing power, the question of application being ordi- 
narily left to the future. The length of time which elapses 
between receipt and outlay depends in part upon the char- 
acter of the individual and his peculiar circumstances, in part 
upon the industrial and financial conditions of the times. 
The disposition toward early outlay is at one time especially 
marked, while at another time the relative advantages of delay 
are highly esteemed and even exaggerated. This feature of 
currency will later become of interest in our examination of 
commercial crises. 

182. Note, also, that the advantages of exchange are pos- 
sible to the individual only to the extent that he has both 
the desire and the opportunity to turn the goods „ .... 

^ i- '' c Does quantity of 

in his control into other goods. Those things wealth measure 
which he prefers to part with upon the terms of demand for cur- 

rcncy ? 

the market form but a small portion of his be- 
longings. Thus only a small part of the wealth of the world 
stands at any given time as demand for currency. The reasons 



244 OUTLINES OF ECONOMIC THEORY 

which determined the buyer to buy are, for the larger part of his 
possessions, reasons which also determine him to retain. The 
advantages possible to him at any one time through exchange 
are readily exhausted. His demand for currency is measured 
by those goods simply which he wishes to exchange for 
others. So much currency as he has in hand measures his 
demand, present or future, for market commodities. 

183. We are now in position to discuss rapidity of circu- 
lation. It is commonly stated that increased rapidity of 
circulation works in parallel manner with an 
Rapidity of increased volume of currency, thus resulting in 

circulation. '' ^ ^ _ 

a lower exchange value for each currency unit. 
But obviously in the absence of credit sales, all exchanges 
would be either barter or cash transactions. An increased 
rapidity of circulation would in such case mean simply an in- 
creased frequency of exchanges, a shorter average period of re- 
tention between the time of the receipt of currency and the time 
of outlay. From this point of view, greater rapidity of cir- 
culation is not a cause but an effect of expanding inclination 
toward trade. Only to the extent that longer average periods of 
retention make toward a rising power of purchase in the currency 
unit, and thereby tend to discourage and retire offers of mer- 
chandise upon or near the margin, can rapidity of circulation, 
or lack of it, be regarded in the light of cause rather than of 
effect. 

The same reasonings apply to circulating credit. 

Suggestive Questions 

Would falling prices stop all selling ? Why not ? 

What is the ultimate basis of the demand for currency ? 

What tendencies make for an increase in the demand for currency ? 

Explain how this works out to raise the value of gold. 

Is it conceivable that the currency demand for gold should become so 
acute as to exclude all other uses ? 

If other nations should adopt gold as their money, what effect on the 
value of gold ? 

On the production of gold ? 

If all nations should demonetize gold, what effect on the value of gold ? 



VALUE OF CURRENCY 



245 



On the production of it ? 

Would these effects be permanent ? 

When would the production of gold again reestablish itself ? At what 
mines first ? 

Make an estimate of how long the full reestablishment would take. 

What effect on the commodity consumption of gold ? 

In what sense does cost of production fix the value of gold ? 

Is this process of quick or slow accomplishment ? Why ? 

If no more gold could be found, what would fix its market value in the 
future ? 

What would limit its possible rise in value ? 



DIFFERENT KINDS OF CURRENCY 
First National Bank, Charles City (Iowa), 1894 

Loans and discounts . $237,600 40 Capital stock paid in . $50,000 00 

Overdrafts .... 385 36 

U. S. bonds to secure 
circulation 

Due from other Na- 
tional Banks . . 

Furniture and fixtures, 

Due from State Banks 
and bankers . . 

Due from approved re- 
serve agents . . . 

Checks and other cash 
items 

Bills of other National 
Banks 

Fractional currency . 

Specie 10,035 50 

Legal tender notes . 8,000 00 

Redemption fund with 

U. S. Treasurer . 562 50 



Total $338,181 64 



12,500 00 


Surplus fund . . . 


10,000 00 


32,713 04 


Undivided profits less 




1,000 00 


current expenses 






and taxes paid . . 


16,533 70 


782 52 


National Bank notes 






outstanding . . . 


5,760 00 


24,888 90 






1,649 79 


Individual deposits . 


255,887 94 


7,972 00 




. 


93 63 







Total 



,181 64 



The foregoing is the report of a typical country bank in the 
fall of 1894. A careful analysis should be made of this 



246 OUTLINES OF ECONOMIC THEORY 

report. Notice tliat the bank has of capital, surplus funds, 
and undivided profits, about $76,000 invested, and has with 
it upon deposit |255,887.94. 

Suggestive Questions 

Show what has become of these moneys. 

How much in notes or overdrafts is due the bank from borrowers ? 

How much has been loaned to other banks by way of deposits ? 

How much may this bank be called upon to pay on any day ? 

What are its immediate resources for this purpose ? 

How much cash has it on hand ? 

How much of this is gold or silver ? 

How much of its resources are in the form of demand rights against 
other banks ? 

What has the bank, in fact, to show for this depositors' money ? 

Do you know what the item " circulation " means ? 

How are national bank notes secured ? 

In what payable ? 

Get one of these notes and see what the bank agrees to do. 

Is it probable that all depositors will call for their money at one time ? 

What would happen if they did ? 

Would there be much profit in banking if for every dollar left at the 
bank the bank must keep a dollar on hand ? 

(The student should re-read Sections 102-104.) 

184. Attention must now be directed to the fact that the 
circulating medium is composed of different elements. The 
Money and cur- Student may have been puzzled by the use in one 
rency distin- place of the term "money " and in another of the 
guished. term " currency." Money and currency are not 

equivalent terms. Currency includes all forms of exchange 
media ; money is but one form of currency. We speak of coin, 
greenbacks, and the like as money. But the 
larger part of business is transacted through 
credit substitutes for these, — through drafts, bills of exchange, 
negotiable notes, and the check and bookkeeping devices of 
deposit banking. In their origin, it is probably true that all 
currencies were composed solely of commodities with a well- 
defined utility for other than currency purposes. But with 
the development of society, the use of substitutes has in- 



VALUE OF CURRENCY 247 

creased. The bank customer thinks of his deposit in the bank 
as money, and it really serves him all the purposes of money. 
It was explained in Section 104 how the right to have the 
money when desired is as good as the actual possession of it, 
and is as readily and as serviceably transferred. When the 
bank customer wants to pay a bill he checks against his 
account. The receiver of the check places it in the bank and 
gets credit for it, the drawer is charged with it, and the trans- 
action is finished, no money having been transferred. These 
deposit accounts in banks commonly aggregate several times 
the cash resources of the banks. These cash resources also 
are largely made up of deposit claims against other banks. 
London, for example, is the clearing centre not only for a 
large part of the business of England, but also for a consid- 
erable portion of the business of the world. International 
interest payments and the transactions of foreign exchange 
are effected by drafts on London. Balances between London 
banks are settled, not in money, but in checks and bookkeep- 
ing at the Bank of England. It results that the enormous 
business of the London banks, aggregating daily hundreds of 
millions of dollars, requires the transfer of only a fraction of 
one per cent in money. It becomes intelligible that the Eng- 
lish people are able to handle their business affairs upon less 
than twenty dollars per capita of money, while France em- 
ploys over forty dollars per capita, though at the same time 
doing a much smaller per capita of business. In fact, one 
rarely comes across a bank in French cities — deposit banking 
is almost unpractised, checks unknown in ordinary affairs, 
and the Paris clearing-house, the only one in France, itself 
scantily patronized. Working people keep their salaries in 
their pockets ; peasants their savings in their stockings ; and 
each merchant serves as his own banker. 

185. Not only have business men invented methods of con- 
venience in doing business which in effect are Government 
creations of currency, but governments and issues, 
banking institutions have made large issues of forms of money 
known as greenbacks, bank-notes, and the like. These forms 



248 OUTLINES OF ECONOMIC THEORY 

of paper money will, for most purposes of discussion, be in- 
cluded within the term " fiat money," although the name applies 
with accuracy only to irredeemable legal tender government 
issues. We have seen that all these substitute forms of cur- 
rency perform the functions of bullion currency — coin — in 
effecting exchanges, and therefore operate in this respect as 
would an actual increase in the supply of the 

Measure function . 1 1 ^ 

remains with Commodity used as money. Note however with 
currency of uiti- especial care that credit currency cannot serve 

mate payment. ~^t ■ ^ \ i n ^ 

as a measure of value. JN or m fact does any hat 
currency preserving an actual redeemability in the money com- 
modity serve as a value measure. The measure function rests 
with those forms of currency only, in which liquidation is ulti- 
mately to be made, or in which payment may be enforced. 

186. The value of the basal commodity, or commodities, 
may be seriously depressed by so large a use of substitutes as 
to set free from currency uses a considerable portion of the cur- 
rency commodity. The effect on the market value of the com- 
modity from the use of substitutes is like that of a new supply 
of the commodity itself. A fall in value becomes necessary if ' 
a market is to be found for all. So, a sharp rise may be caused 
at any time by the concentration of currency demand upon 
the currency commodity, to the exclusion in a large degree of 
substitutes. But it still remains true that, however fluctuating 
may be the measure of value, this measure is furnished by the 
basal (commodity. This principle will, however, be made clearer 
in the succeeding discussion. 

Suggestive Questions 

When a merchant deposits in the bank, say $1000, is all of this usually 
in actual money ? In what else ? 

Suppose you have $1000 to your credit — on deposit as it is called — 
at the hank, is this money really there ? 

How much is at the bank to answer for your $1000 ? 

When you wanted to pay a bill, would you probably draw money or 
make a check ? 

How could the merchant make the check serve him as money without 
ever seeing the real money for it ? 

What is a clearing-liouse ? 



CHAPTER XVIT 

GEESHAM'S LAW 

The Cheaper Money Displaces the Dearer 

187. Gold serves liuman purposes not in one, but in many 
ways. Thus, if tlie supply of it is increased for any reason, 
the increase will divide itself among many uses. A part only 
will go to increase the volume of currency. Likewise, were 
gold the basal and only commodity used for currency, and were 
the entire increase in the supply of it coined as money, a share 
of this increase would flow out from currency into pu.rely com- 
modity uses. This result would come about from the fact 
that any increase in the volume of currency units must be 
attended by a corresponding fall in the purchasing power of 
the unit, this purchasing power being determined by the rela- 
tion between the number of units and the volume of exchanges 
to be effected. Double the currency, and it will require two 
units to purchase what one would purchase before. In view 
of this tendency to fall, a considerable part of the coined gold 
becomes more desirable for commodity uses than for purchas- 
ing commodities. 

The proposition then holds for gold, as for any other form 
of currency, that doubling the volume halves the purchasing 
power; but it is to be remembered that to coin gold is not nec- 
essarily to fix it in currency uses. Not all of the gold forced 
into currency is safe to stay there. Coinage of gold sets other 
gold free. Inflow causes outflow — though, as we shall see, not 
an equivalent outflow. But, however great may be the entire 
gold output necessary in order finally to double the currency 

249 



250 OUTLINES OF ECONOMIC THEORY 

volume, when once the doubling has taken place the value of 
the unit must have fallen to correspond. This, of course, 
assumes that gold is the only currency aside from credit, and 
assumes, as well, what will later be proved, that the volume of 
credit, relatively to other currency, tends to preserve a constant 
proportion thereto, irrespective of the amount of such other 
currency. (Section 212.) 

It is worth remarking, that increases in the volume of coined 
money do not in fact come about by deliberate attempts at 
inflation ; inflation of a freely coined metal is indeed almost a 
paradox. The supply of gold for currency is drawn from the 
general market supply, both coin and commodity uses expand- 
ing naturally and simultaneously with expanding supplies of 
metal. But were it otherwise, — were the entire product 
first coined as money, — the result would be the same. As 
gold flowed in, other gold would flow out, only a share of the 
increase continuing to serve as currency. 

In later pages we shall have occasion to note that in case an 
increase of currency, for example by increased gold produc- 
tion, takes its beginning in any one country, the first effect is 
an increase in the local volume of currency, necessarily attended 
by a rise in prices. Imports tend toward increase, and gold 
goes abroad for payment purely as an industrial product, 
though possibly drawn mostly from the volume of circulating 
coin. In the country of its destination, the effects are those 
which we have just examined as characteristic of all increases 
in the volume of currency. 

Suggestive Questions 

Suppose the government to issue a large sum of legal tender paper 
money, would this make a dollar easier to get ? 

What effect, then, on the amount of commodities which a dollar would 
purchase ? 

Can you have a money in which getting is easier, that is, in Avhich you 
sell at higher prices, without also paying higher prices when you buy ? 

What effect would a decrease in the exchange power of gold as money 
have on its use as plate and gilding and oi-nament ? 

Suppose your gold would get you a high-grade bicycle or would make 



GRESHAM'S LAW 251 



into a gold watchcase ; how if the gold fell so that your choice lay between 
a second-grade wheel and the gold watchcase ? 



GRESHAM'S J. kW — Continued 



188. Because of the power given under the law to fiat cur- 
rency, equally with the basal commodity, of discharging in- 
debtedness, of serving as a liquidator of credit, 
currency of this sort is to be conceived for ^ ectsoffiat 

•^ money. 

most purposes as a portion of the commodity 
currency. So long as the iiat issue contains of itself a num- 
ber of units insufficient at the established purchasing power to 
supply the needs of exchange, the currency commodity will in 
some measure circulate side by side with the fiat units, and 
the fiat units and the commodity units will be of equal value. 
(Proof of this proposition must be postponed to later pages. 
Sections 193-202.) But it is to be noted that the displacement 
in any degree of commodity units by fiat units is possible only 
upon parallel terms with displacements by credit substitutes. 
Some part of the commodity currency becomes superfluous as 
currency, unless accompanied by a depreciation of the unit; 
the unit therefore depreciates till the demand for non-currency 
uses has effected a new adjustment of values — the value of 
the fiat units remaining equal to the value of the commodity 
units, but the value of the commodity units falling on account 
of the larger supply at hand for non-currency purposes. 

Put in this fashion the foregoing statement is not readily 
intelligible. The case is one of that class where a force sets 
into action partially counteracting tendencies. There is the 
old example of water pouring from one receptacle into another 
and coming to a stop, in part from the lowering of the level 
in the first receptacle, in part from the rising level in the 
other. So one may stop selling hats, in part from the approach 
toward exhaustion in his own supply, in part from the con- 
stantly greater difficulty in finding a profitable market. So, 
in our currency case, assume that we start with a billion of 
coin units, and that now a billion of fiat units be added. The 
value of the unit must be halved if all the coin units remain 



252 OUTLINES OF ECONOMIC THEORY 

in the currency. But at any appreciable fall, coin flows out 
into industrial uses in response to the larger demand made 
possible by lowered values. The tendency toward fall, as 
coin, is in some measure counteracted by the absorption of the 
bullion for industrial uses. Yet some fall must have taken 
place in order to attract the larger market demand. The fiat 
issues have operated in effect as would an increased supply of 
bullion. Bullion as money and bullion as market commodity 
have both fallen, and fiat units, being in value merely repre- 
sentative of commodity units, have necessarily followed in the 
fall. 

We may then say that any expansion of the currency, whether 
by fiat or credit additions, tends, other things being equal, to 
the depreciation of the miit. Should the fiat issue contain of 
itself more than sufficient units to supply the demand for 
exchange purposes, the commodity units would be entirely 
displaced from the currency by fiat units, and the value of the 
fiat units would adjust itself by depreciation to the demand. 
This is an application of Gresham's law that the cheaper money 
displaces the dearer, or, as it is more commonly put, that bad 
money chases good. 

Suggestive Questions 

Would an increased use of silver as money set free any gold for com- 
modity uses? Why? 

How would the value of gold as commodity be affected? 

How would its purchasing power as money be affected ? 

Would its purchasing power as money fall unless its value as com- 
modity fell also ? Why? 

Is the purchasing power of gold as money given to it by the fact that 
it is stamped by the government ? 

Does its purchasing power result in any degree from the fact that it is 
used as money ? 

May its use as money be effective in this regard though the government 
stamp is not effective ? 

Is it true that the stamped coin is worth exactly the value of its con- 
tained bullion ? 

If the stamp does no more than certify the weight and fineness, who 
pays for the stamping ? 

What is seigniorage ? 



GRESHAM'S LAW 253 



GRESHAM'S LAW — Continued 

189. All displacements of currency by fiat or credit substi- 
tutes must, as we have just seen, result in depreciation in the 
purchasing power of the unit — or prevent appre- 
ciation — even if the displacement be incomplete, pjace unit?^^' 
and commodity units and fiat or credit units con- 
tinue to circulate side by side at equality of purchasing power. 
It is only by way of depreciation as currency that an out- 
floAv of commodity units from currency uses becomes possible. 
This outflow tends to counteract the depreciation of the com- 
modity as currency, but makes toward depreciation of the com- 
modity as commodity. The outflow continues until the value 
of the commodity as currency equals the value of the com- 
modity as commodity. So, while it is true that a cheaper 
currency displaces a dearer, it is not true that for every cheaper 
unit supplied there is the displacement of a better unit. The 
usual statement of Gresham's law requires qualification in this 
respect. If the currency commodity is one the demand for 
which, for non-currency uses, would be largely expanded by a 
very slight fall in value, it will result that the number of 
cheaper units supplied will be nearly equalled by the number 
of dearer units displaced. If, on the other hand, the utility 
of the commodity for other than currency purposes is slight, 
or the demand for it inelastic, the displacement will be small 
relatively to the number of new units supplied, and the depre- 
ciation of the currency unit will be relatively great. 

Here, again, illustration is necessary. 

Suppose, in the first instance, that the original currency con- 
tains no marketable elements, that it is, for example, all fiat. 
Doubling the amount will simply halve the value of the unit ; 
if, on the other hand, the original currency is of such a char- 
acter that any very slight fall will open up a large market 
demand, the issue of the fiat currency will push nearly the 
entire body of commodity units into non-currency uses. xVl- 
most as many commodity units will be displaced as there were 



254 OUTLINES OF ECONOMIC THEORY 



fiat units injected, and the value of tUe unit will therefore have 
changed but in slight degree. 

Our proposition stands then as follows : The larger and 
wider the non-currency demand for the currency commodity, 
the smaller the price fluctuations from fiat additions or from 
the discovery of new sources of supply. 

The use of algebraic processes in the determination of this 
point of new adjustment will be found helpful as illustrating 
the operation of this currency law. For this purpose there 
must be assumed a definite and uniform rate of elasticity in 
the commodity demand and in the demand for currency — the 
volume of business to be transacted must be taken as a con- 
stant. Let this volume be represented by 1000. Any increase 
or decrease in the number of currency units must then be 
offset by a corresponding decrease or increase in the purchas- 
ing power of the unit — the total efficiency of the currency 
never varying from this 1000. The number of units before 
the expansion takes place must, therefore, be taken to be, for 
example, 1000 in gold. Assume now that 100 fiat units are 
issued, and that the industrial demand for gold is capable of 
absorbing new marketings of it on terms of a fall of one 
per cent for each 25 units thrown upon the market. It is 
required to determine how many gold units will be displaced 
from the currency by this issue of 100 fiat units. Evidently, 
since the value of the units must depreciate, there must be 
enough more of them so that the new value multiplied by 
the new quantity will give 1000 exchange power. 

1000 = Currency requirement (demand for business). 
1000 = Original volume. 
100 = Fiat issue. 
X = Net increase in volume. 
1000 + X = Total as increased. 
25 of gold sold on the market causes 1 per cent fall. 
1 of gold sold on the market causes ^V ^'^ = 2 sVo- 
100 — X = amount of gold displaced from currency (marketed). 



GRESHAM'S LAW 255 



(1) 



(1) 1 - l^Ojz^ = new unit value. 

^ ^ 2500 

1000 + x\(l - lOO^L^A ^ 1000. 
)\ 2500 / 

flOOO + x\ /?400_+x\ ^ jQQQ_ 
\ A 2500 j 

2,400,000 + 3400 x + x^ = 2,500,000. 
a;2 + 3400 X = 100,000. 
a;2 + 3400 X + (1700)2 = 100,000 + (1700)2. 



X + 1700 = V'100,000 + 2,890,000. 
x + 1700 = 1729.16. 
x = 29.16. 
^ 100 - X _ 2400 + X 
2500 ~ 2500 

^'^^^ + ^ = .971664, new unit value. 
2500 

.971664 X 1029.16 = 909.99+. 

The student will do well to set himself new problems for 
solution, changing the conditions. 



CHAPTER XVIII 
INTERNATIONAL TRADE AND CURRENCY 

If by an increase in the volume of currency prices are raised, what 
effect will this have on imports ? On exports ? 

If we were to expand our currency by greenbacks or silver, what effect 
would this have on exports ? Imports ? Our holdings of gold ? For- 
eign holdings of gold ? 

If we exported but did not import, what effect on the volume of cur 
currency ? On prices here ? On prices abroad ? 

190. But the foregoing is only one of tlie applications of 
Gresham's law. Thus far we have failed to allow for differ- 
ences in the monetary systems of different countries. Our 
discussion has proceeded upon the tacit assumption that the 
world's currency is homogeneous, and that fiat or credit expan- 
sions in one country exert no peculiar influence at the point of 
expansion. And in large degree it is true that the great com- 
mercial nations of the world form one commercial community 
and employ one established international currency. But it is 
true, also, that in each country there exists a considerable vol- 
ume of currency which is not of international character, but is 
a substitute therefor, and is adapted to domestic circulation 
only. Balances in international trade must be settled in the 
international currency commodity. If in any country for any 
reason there comes about a level of prices higher 
Expansion and than rules in other countries, there must result 

balance of trade. ' 

both a lessened exportation of merchandise and 
an increased importation. A resulting adverse balance of trade 
necessitates a shipment of the international currency. It is 
evident, then, that the tendency indicated in Gresham's law may 

256 



INTERNATIONAL TRADE AND CURRENCY 257 

manifest itself in two ways, — first, by retirement of the currency 
commodity for domestic non-currency uses ; second, by export 
to other countries. The domestic retirement is caused directly 
by depreciation of the currency unit. The foreign outflow 
follows an adverse balance of trade resulting from a raised 
level of domestic prices. It is worth calling to mind in this 
place that stocks and securities of international standing take 
in some measure the place, of gold or commodities in tilling 
adverse balances. 

Let it be supposed, in illustration of international movements 
of currency, that the money circulation of the United States is 
1,500,000,000, and that of Europe 10,000,000,000, which figures 
are probably not far from correct. Supj)ose, also, our billion 
and a half of money to be all of international character, namely, 
gold. If, now, an attempt be made to double our money vol- 
ume by the issue of a billion and a half of fiat units, it is evi- 
dent that prices must by appreciation adapt themselves to the 
level made possible by a larger volume of currency. This rise 
in prices must discourage exports and stimulate imports. 
That which was formerly sold for 90 in Europe and 100 here, 
now being worth say 110 here, would be more largely im- 
ported ; what was formerly at 90 here and 100 in Europe, now 
being worth 100 here, would cease to be exported. So long as 
our gold continued to circulate as money, the unfavourable 
trade balance would be settled in exported gold. When inter- 
national prices had reached their new level, the case would 
stand as follows : the aggregate currency of Europe and Amer- 
ica would have increased from 11,500,000,000 to 13,000,000,000 ; 
a general advance of 11.3 per cent in prices would have taken 
pla(!e ; our currency would have increased from 1,500,000,000 
to 1,500,000,000 X 1.113 = 1,669,500,000,-169,500,000 of this 
being gold, and the remainder of the gold having left to swell 
the circulation of Europe. 

An issue of two billions of fiat by us would give the follow- 
ing outcome : 

All our gold would have departed for Europe. 

E-ise in prices in Europe of 15%. 



258 OUTLINES OF ECONOMIC THEORY 

Our need for money on this new gold basis, 1,725,000,000. 

Our actual circulation, 2,000,000,000. 

Gold at premium of 15.9%. 

Rise in prices as reckoned in paper money, 33%. 

191. And there is a third manner in which Gresham's law 
may make itself manifest. If the commodity added to do- 
mestic currency is itself the subject of international trade, but 
is not a commodity used for international currency, there will 
ordinarily occur, in case of a favourable balance of trade, an 
inflow of the substitute commodity, while adverse balances 
must be settled in the international commodity. This inflow 
of the commodity used as a local substitute is evidently not 
possible in cases where the local substitute cannot be procured 
from foreign sources, as, for example, fiat or local credit sub- 
stitutes (greenbacks, bank-notes, checks, etc.). 

192. Bearing in mind that if the volume of currency at any 
point is in excess relatively to established prices and the n«eds 
The futility of °^ business, this excess must, if the currency 
local attempts at contain a commodity element, tend toward dis- 
inflation, appearance either for domestic non-currency uses 
or for foreign export, the futility and danger of any local 
effort toward an increased currency becomes evident. Attempts 
of this sort can attain their purpose only in proportion as the 
currency of the world is expanded, unless the currency of the 
nation attempting expansion loses the total of its commodity 
elements — e.g. gold — and becomes entirely a non-international 
currency — e.g. fiat. 

We shall shortly consider the bearing of this fact upon the 
question of silver coinage. It is also important to note the 
argument as it touches the protective tariff question. Until 
this stage of the currency discussion was reached, it was im- 
possible to develop what is, in fact, an altogether unanswerable 
argument against the protective tariff system, so far as it is 
directed towards selling without buying. The meaning of the 
economic axiom should be now clear that selling depends on 
buying, and that imports and exports tend to offset each other. 



INTEKNATIONAL TRADE AND CURRENCY 259 



Suggestive Questions 

What tendencies would arise to put an end to an export of gold result- 
ing from higher prices ? 

What effect would foreign prices feel ? 

How is it true that nations cannot buy unless they sell ? Or sell unless 
they buy ? 

What has this to do with the tariff question ? 

Is it true of nations that division of labour is possible only on terms of 
possible exchange of products ? 

Give the different workings of Greshani's law ; do you yet see any 
bearing on the silver question ? 

In commodity currency where does supply come from ? 

What would measure value if the legislature fixed the supply, for 
example in paper ? 

Would paper or commodity currency best adapt itself to demand ? 



Suppose the portion of the pyramid above the line to represent that 
portion of the commodity used as currency ; below the line the commodity 
uses outside of currency ; in which case would changes in supply work 
the larger change in the value of the currency unit ? 



CHAPTER XIX 
IRREDEEMABLE CURRENCY 

Would paper money be good for anything if all the money were paper : 
(a) If the government promised to pay? (h) If the paper were merely 
made legal tender ? 

Can value be given to anything by legislative enactment ? 

Would any demand exist for legal tender irredeemable paper ? For 
what purpose ? 

If it could be made to perform the functions of money, would it have 
utility ? 

If also the supply were limited, could it have value ? 

What are the requisites of value ? 

Is there any intrinsic value ? 

193. That government issues of paper money may be made 
to circulate and to perform the money function is a familiar 

fact in business affairs. The American people 
^^miiiarT^t ^^® accustomed to many different forms of paper 

money ; there is probably no modern nation of 
considerable size and importance which has not, directly 
through the government, or indirectly by imperial or private 
banks, made large use of paper currencies. National bank 
notes circulate in the United States to the amount of about 
200,000,000 dollars, — one-eighth part of our entire money 
circulation. There were in circulation October 1, 1894, over 
260,000,000 of greenbacks, United States promises to pay. 
The gold coin in circulation at the same date w^as 500,000,000. 
Under our present financial system, all forms of paper money 
are redeemable in gold, either by legal enactment or pursuant 
to the established policy of the government. Not only is it 
an important matter theoretically, but it is a question of acute 

260 



IRKEDEEMABLE CUREENCY 261 

political interest to determine whether paper currencies circu- 
late solely by reason of their redeemability, or may circulate 
without redeemability, and only by virtue of 
their legal tender power. Note that we are not, ^^^^ makes 

^ , . ' them circulate ? 

at present, set to examine into the expediency 
of irredeemable paper issues, but only into their theoretical 
possibility. One large political party asserts that money is 
of government creation, that the national stamp and the legal 
tender attribute are the only essentials, and that it is both 
possible and desirable that the government should furnish 
from its printing presses the circulating medium. The reply 
is commonly to characterize these proposals as nonsense, — as 
attempts at a miracle. The following words from Comptroller 
Eckels summarize the views of most conservative financiers : 
" Embedded in the minds of many of our people is the illusive 
theory that something can be created out of nothing, — and 
that governments are invested with a power denied to indi- 
viduals, of making that something out of nothing." Mr. 
Lyman Gage states the position tersely, as follows : "There is, 
in truth, only one real money, — metallic coin." 

If, however, irredeemable paper currency is possible and the 
inflationists are right thus far, we need to remember that it 
is an exceedingly dangerous thing to attack an error where it 
is strong. There is no evidence like this of the tenability of 
associated untruths. It is important not to deny too much. 

194. We have already had occasion to condemn the notion 
of intrinsic value. Utility is merely the power of satisfying a 
human need. Utility is applicability, appropri- 
ateness. Whatever serves a human requirement ^ "'^^^'^ ^^ ^^ 

J- IS nonsense. 

bears value if limited in quantity. The currency 
need is for an exchange medium. That which serves this 
need has utility, socially and individually, and lacks no essen- 
tial of value, if at the same time it is scarce. Utility can be 
added to anything if the power to serve can be attached to it. 
There is, then, nothing formidable in the miracle argument 
pure and simple. The real question remains, however, none 
the less difficult. 



252 OUTLINES OF ECONOMIC THEORY 

It is important that the argument up to this point be clearly 
understood. The value of the circulating medium, like the 
value of all other subjects of exchange, is pri- 
marily dependent upon the equation of demand 
and supply, and is only secondarily dependent on sacrifices of 
production as bearing on the supply factor in the equation. 
If production is impossible or exceeds in sacrifice the condi- 
tions of demand, costs or sacrifices of production are irrelevant. 
The volume of currency remaining constant, currency values 
fluctuate with fluctuations in demand. Demand is not meas- 
ured by the total volume of wealth or commodities, but by 
the volume seeking change into currency, whether as a step 
toward an immediate exchange of commodities, or as an effort 
to obtain currency for purposes of hoarding, or for the purpose 
of effecting a liquidation of liabilities. The advantages accru- 
ing to exchangers, the quantities termed producers' and con- 
sumers' rents, are the motive force behind the demand for 
currency. The demand is made up (1) by the offer of goods 
against currency by way of immediate sale, or (2) by promise 
of future goods against present currency (future sale), or (3) 
by offer of future currency against present currency (borrow- 
ing). Appreciation or depreciation, whether believed to be 
temporary or permanent, can affect this demand volume only 
to the extent that the sellers' rent is believed thereby to be 
cancelled and the advantages of exchange therefore destroyed. 
195. Our foregoing discussions of fiat and credit factors in 
the currency have proceeded upon the assumption that the 

. ^ introduction of these factors will not seriously 
"Would flat mfla- -^ 

tion retire the modify the demand for circulating media. The 
demand for correctness of this assumption must now be 

examined. For this purpose we shall consider 
separately the different elements which make up the demand 
for currency — (1) for purposes of immediate reexchange into 
commodities ; (2) for purposes of retention awaiting a later 
application ; (3) for purposes of debt liquidation ; (4) in some 
small degree, for purposes of holding for so long a time as to 
merit the name of hoarding. 



IRREDEEMABLE CURRENCY 263 

The demand for hoarding is commonly inconsiderable in 
modern societies on account of the facilities for loaning at 
rates of interest which are in themselves an 
object. The demand for purposes of mediate or 
immediate exchange cannot be diminished, unless the aggre- 
gate social product is lessened, or division of labour is ren- 
dered less complete, or in some degree a return to the system 
of barter takes place. The demand for purposes of debt liqui- 
dation is not constant in volume, but is certain to exist as long 
as indebtedness continues to be created. 

It is unquestionable that disturbances from currency causes 

are possible in industry to such a degree as seriously to lessen 

the aggregate social production. This condition _ 

°° ° 1 Would not cause 

of disturbed exchanges must, however, if long decrease of 

continued, ultimately result in an industrial product or in- 

,,,.,, .-. „ crease of barter. 

order characterized by a smaller sum oi ex- 
changes ; in other words, there must result a less division 
of labour or an increase of barter. There is certainly no suf- 
ficient reason to believe that permanent inactivity for any part 
of the industrial system would follow a change in currency 
methods. The disadvantages of barter already outlined are 
so great as to make it altogether improbable that society 
would or could, in large degree and permanently, revert to 
that system. Nor could a permanent decrease in division of 
labour be expected. Producers' (sellers') and consumers' 
(purchasers') rents are quantities of such importance that 
some form of currency is certain to circulate, even if of a most 
fluctuating and unsatisfactory character. If a demand for 
fiat currency may be assumed to have once existed, there is no 
fact other than changes in legislation which would give to fiat 
currency an extremely fluctuating character. And it seems clear 
that if any sort of currency exists, the advantages of division 
of labour cannot for the aggregate of society be lessened. 
It is, however, possible that so great liability 

n ■ T 1 -, 1 ■ I- n Fiats not likely 

to fluctuation should characterize any torm ot ^^ ^e used as 
currency, or so great distrust of it should exist, standard of de- 
as very seriously to decrease the demand for short- " p ^ 



264 OUTLINES OF ECONOMIC THEORY 

time holdings or for lioarding, and, to a still greater degree, to 
limit its use as a standard of value for deferred payments. 

196. We may profitably resume our conclusions up to this 
point. The use of a suspected or fluctuating currency will not 

permanently influence the organization of in- 
intermediate dustry in the direction of a less extended divi- 

summary. *' 

sion of labour, or of a more extended system of 
barter or of lower productive activity. Some form of currency, 
public or private, bullion or fiat, will circulate to an extent to 
permit of exchanges. But we have as yet seen no reason to 
believe that some form of private or bullion currency might not 
be adopted in place of fiat issues. So far as hoarding and loan- 
ing are concerned, fiat issues would probably not be employed. 
But the every-day business of exchange and the holding of 
currency for short periods would not be interfered with by 
fiat currency, if only it should circulate at all at any value, 
and the fluctuations from day to day were so small as to be 
unimportant. 

What course any people would take with reference to depre- 
ciated fiat issues, if depreciation should occur, is conjectural. 

California held to payments in gold during the 

If depreciation ^ '' '^ ° 

occurs, fiats may years when gold was at a premium ; the gold 

be excluded from measure was commonly agreed upon for deferred 
general business. ... 

payments. But our inquiry is merely whether 

an irredeemable issue would of necessity suffer depreciation. 

197. There is no a priori method of determining how large 
an issue, if any, of fiat currency could be made without appre- 
hensions arising, sufficient to induce the use of some sort of 
commodity currency as a standard of deferred payments. But 
until credit methods ceased, or commodity payments were gen- 
erally agreed upon, fiat currency would circulate. 

tinue with fiats That credit operations should cease is improb- 
exciuded as able, if not out of the question. A commodity 

ment^"^ ° ^^^' standard of deferred payments would, however, 
almost certainly appear if depreciation of the 
fiat issues had set in, and might appear in any case. 

But the mere fact that a commodity currency tvas adopted for 



IRREDEEMABLE CURRENCY 265 

deferred payments woidd not necessitate a depreciation of the fiat 
currency units relatively to the commodity units. So long as the 
number of fiat units remained insufficient at the establislied 
purcliasing power of the unit to supply the demand for cur- 
rency, so long commodity units would circulate. 

198. But would the fiat units preserve their parity with the 
commodity units ? It has been assumed that the mere fact 
that some commodity units remained in circulation would 
maintain the parity of the legal tender paper issues. Evi- 
dently enough depreciation would accompany the entire dis- 
appearance of the commodity units in the degree that the 
issue of fiat currency was excessive. But so long as com- 
modity units remained in circulation, would the power given to 
the fiat units equally with the commodity units of discharging 
indebtedness preserve the market parity ? 

Is it not possible, or even probable, that the fiat units would 
be refused at a parity in daily trade, as we have admitted that 
they might be excluded from use for hoarding 
or for deferred payment purposes ? If the cir- tion cause 
culating quality of fiat currency depends solely further deprecia- 
upon its debt-discharging power, how make cer- 
tain that debts would continue to be created, unless upon pro- 
vision for commodity payment ? In short, how make certain 
that the demand for fiat currency would maintain itself ? 
Certainly as a psychological question one side is as easy of 
assertion as the other. 

199. We have seen in preceding sections that value for 
currency purposes and value for non-currency purposes exhibit 
no necessary inter-relation if only the supply of currency be 
limited. The volume of currency must serve for the business 
to be transacted, and will do so at no matter how great appre- 
ciation. The possibility of seigniorage charges is Quantity and not 
explicable only upon this principle ; the stamped material impor- 
coin has a value which the mere bullion has not. ^^ ' 

It is upon the same principle, also, that we must explain the 
fact that, in the history of English coinage, the currency was 
never depreciated in the same proportion that it was debased. 



Would deprecia- 



266 OUTLINES OF ECONOMIC THEORY 

(Uicardo.) The theoretical possibility of the profits of seignior- 
age covering the entire currency value is indicated by these 
facts. 

200. It is doubtless conceivable that through well-founded 
fear or unreasoning prejudice men should in private affairs 

refuse to give time in business transactions, 
Taxation mam- ^^j^iggg a commodity payment were agreed upon, 

tains demand. j x j o l 7 

or a moral or legal guaranty of redeemability were 
believed to be recognized by the government. But it is to be 
recalled that where a full legal tender power is given to fiat 
currency, the government in its tax collections is compelled to 
support the market parity, so long as limited fiat issues render 
this possible. Government yearly creates in its favour a large 
volume of indebtedness under the form of general or local 
taxes. In the United States this yearly aggregate of taxes 
probably exceeds the entire volume of governmental or quasi- 
governmental currency. As long as a fiat dollar will pay taxes 
equally with a bullion dollar, so long the fiat currency will re- 
tain its circulating characteristic, and depreciation will mani- 
fest itself only when, through over-issue of fiat units, every 
commodity unit, gold for example, is worth more as com- 
modity than as currency ; in other words, until the least valu- 
able use for non-ci;rrency purposes of any part of the commodity 
currency is greater than its value when employed as currency. 
Should this condition of over-issue be reached, the currency 
would consist entirely of fiat units, and exchanges would take 
place through them, though a commodity measure might still 
be employed for deferred payments, and hoarding might be 
mostly confined to certain kinds of bullion. 

201. The correctness of these conclusions is sufficiently 
attested by history. Fiat issues do circulate. If fiat can give 
any value, it can by a stricter limit give full value. England 
has in the past illustrated the truth of this. The legal tender 
power sustains in a measure the value of currency. Argentine, 
Italy, Austria, and Russia are recent instances. The United 
States furnished an example during the period before specie 
resumption. 



IRREDEEMABLE CURRENCY 2G7 

The case of the United States must, however, suggest the 
action of other influences, if the fluctuations in currency values 
following the changing fortunes of the war of 
the Rebellion are to be explained. These flue- ^^e^iceof spec- 

J- ulation on flats. 

tuations were far too marked and too rapid to 
be accounted for solely by changed relations between the 
volume of business and the volume of currency. Faith in the 
continued legal existence of the government was a fluctuating 
quantity, as was also faith in the power or disposition of the 
government to make ultimate redemption. Hence resulted, at 
one time, great increases in the volume of hoarding and in- 
vesting demand, and at anotlier time, great increases of supply 
through panic-stricken marketings of previously acquired hold- 
ings. In short, to the ordinary working of currency laws must 
be added in cases of this sort all the influences of active and 
far-sighted speculation. 

It remains to add that while we have conceded the theoret- 
ical possibility that, for purposes of hoarding or value-meas- 
uring, a private or bullion currency might displace fiat issues, 
and while we must concede that this substitution would prob- 
ably take place so far as the standard of deferred payments 
was concerned, yet, for purposes of current market measures 
the tendency is well-nigh irresistible for that currency which 
is used as the exchange medium to serve also as a value meas- 
ure — since, historically and theoretically, the measure func- 
tion is purely subordinate and derivative. 

202. The foregoing discussion should in no sense be taken 
to justify, for practical purposes or in any case, the issue of in- 
convertible paper money. There is always dan- irredeemable 
ger of paper issues being carried to excess, and currency never 
if the safeguard of redeemability is removed, no 
sufficient provision against excess remains. So long as excess 
is not reached, redeemability exists in fact, and therefore no 
harm can attach to the recognition of legal redeemability. 

Walker states the case admirably : " Lest I should be mis- 
understood, let me say that it is my firm belief that the issue 
of inconvertible paper money is never a sound measure of 



268 OUTLINES OF ECONOMIC THEORY 

finance, no matter what the stress of the National exigency 
may be ; I believe it to be as surely a mistaken policy as the 
resort of an athlete to the brandy bottle. It means mischief 
always. If there is ever a time when a nation needs its full 
collective vigour with a steady pulse, a calm outlook, a steady 
hand, a brain undisturbed by the fumes of this alcohol of com- 
merce, — paper money, — it is when called to do battle for its 
life with superior force. It is to my mind the highest proof of 
the supreme intellectual greatness of Napoleon that, during 
twenty years of continuous war, he never was driven to this 
desperate and delusive resort. I hold any man to be some- 
thing less than a statesman in the full sense of that word who, 
under any stress of fiscal exigency, supports or submits to a 
measure for the issue of paper money not convertible at the 
instant on demand without conditions into coin money. The 
political arguments by which such measures are always sup- 
ported on the outbreak of war, seem to me the veriest trash, 
due half to ignorance and half to cowardice." — Advanced 
Course, Sec. 214 n. 



BIMETALLISM 



203. Whether the currency of the commercial world is tend- 
ing toward appreciation or toward depreciation in unit value is 
Is the currency ^ question of considerable difficulty. With in- 
unit appreciat- Creasing population, expanding production, and 
^^^' extending division of labour, the demand for cur- 

rency is rapidly becoming greater. But this demand is in a 
large degree supplied by the growing use of credit substitutes 
as currency. Were it not for this currency function of credit, 
the average of prices would tend inevitably toward fall, unless 
a larger use were made of fiat currency, or unless the mar- 
ginal sacrifices of precious metal production should, through 
discovery or invention, be reduced as rapidly as the marginal 
sacrifices in the average of other products, due regard being 
had to the proportions in which different commodities and ser- 
vices enter into the average consumption. 



IRREDEEMABLE CURRENCY 269 

But as an estimate of actual tendencies, our question needs 
examination from the point of view of statistics. Expanding 
production and falling commodity prices are necessarily accom- 
panied by increase in the value of services. With commodity 
values tending toward fall, and service values tending toward 
rise, the statistical answer cannot be more than a loosely ap- 
proximate one. In theoretical aspects this subject was suffi- 
ciently covered in Sections 162-166, and Avill be examined as a 
current question in Section 317. 

There can be no doubt that a tendency toward rising cur- 
rency value is a thing to be avoided if possible. There is a 
widespread conviction that such a tendency exists at present, 
and it is for the most part on this ground that bimetallism is 
earnestly advocated. Bimetallism is to be understood as a 
currency system resting upon a double commodity measure 
of value, gold and silver for example, both commodities being 
freely coined at the established coinage ratio, and each having, 
equally with the other, legal tender power for the payment of 
debts. 

204. The application of the principles discussed in Sections 
190, 191, to what we may term national bimetallism is suffi- 
ciently obvious. The outcome must be at best a National bimet- 
system of monometallism, alternating from one aiiism equals 

to the other currency commodity, accordingly as ^""^""^^ ^ '^'"• 
the relative market values may fluctuate. Any agreement 
on the part of the State to redeem either metal in the other, at 
the established coinage ratio, could result in nothing but loss 
and failure to the government undertaking the burden. This 
would amount to a standing offer by the government to submit 
to loss at every market fluctuation in the relative values of the 
currency commodities. That no one government could suffi- 
ciently control the demand to prevent this fluctuation was 
sufficiently shown in Sections 191, 192. 

205. But however clear the case may be against national 
bimetallism, the question is an altogether different one for 
international bimetallism. We have seen that no displace- 
ment of one currency commodity by another can take place 



270 OUTLINES OE ECONOMIC THEORY 

without some tendency toward depreciation of the currency 
unit, and some tendency toward depreciation for non-currency 

purposes of the same material used as commod- 
LTaTSe. ity- If silver drives gold from the currency, it 

is because by the inflow of silver the unit of cur- 
rency is depreciated to such a degree that the gold employed 
as currency is rendered more valuable in other markets than 
in the currency market. But the increase of supply in the 
non-currency market tends to lower values in that market, and 
to counteract the tendency toward outflow from currency uses. 
Gold cannot entirely disappear from the currency of any 
people, unless the supply of silver is sufficiently large to per- 
mit the last unit of silver inflow to be of less value than the 
last unit of gold outflow. Speculative departures in relative 
values in view of possible future contingencies are to be allowed 
for in these adjustments of value. Note, also, that just as by 
the increase of supply in gold for commodity purposes gold 
tends toward fall, so the increased market for silver for cur- 
rency purposes and the resulting decrease in supply for com- 
modity uses must tend to force upward the market value of 
silver. 

206. It is then evident that were a sufficiently large number 
of governments committed to the use of gold and silver at a 

fixed ratio of value, the relative market values 
^if "!^, ™^f ^* ^^ could for a long time be maintained through the 

short-lived. ° _ _ ° 

compensatory action above outlined, and that for 
such time as the market parity was maintained, fluctuations in 
the value of the currency unit would in a large measure be 
controlled. But it is still true that were the coinage ratio 
extremely wide of the normal cost-of-production ratio, this 
parity might be extremely short-lived, or even unattainable at 
the outset. And it is true that an increase in the volume of 
one of the metals at a constantly falling market value is possi- 
ble in any case to such a degree as finally to disturb the relative 
values of the two metals ; that is to say, it is possible that 
either metal might ultimately be entirely displaced by the 
other, — the compensatory working of international bimetal- 



IRREDEEMABLE CURRENCY 271 

lisia thus conducting finally to international monometallism. 
Whether or not this outcome could reasonably be anticipated 
is not a question of theory. A careful study of present and 
future conditions of supply, and of probable modifications of 
demand in reference to both metals, would be necessary to 
justify even a conjecture upon this point. But it is safe to 
assert, as matter of theory, that international 
bimetallism, if entered into in good faith and ^ouid failure be 

' ^ disastrous ? 

pursued consistently, might be salutary while in 
operation and without catastrophe in any possible outcome; 
and if finally conducting to monometallism, would raise no 
theoretical difiiculties to reestablishment at a new ratio of 
values between the metals. 

Suggestive Questions 

Would free coinage at 16 to 1 increase the amount of money ? 

What effect on prices ? On use of gold in arts ? On foreign trade ? 

On export of gold ? On foreign prices ? On market value of gold ? 

Under international bimetallism, what effects in these same directions? 

How would these effects be modified were the coinage ratio 25 or 30 
to 1 ? 

The yearly product of gold is about 150,000,000 ; of silver (coinage 
value), 200,000,000 ; our money volume, 1,500,000,000 ; European volume, 
10,000,000,000 ; world supply of gold coined or obtainable for present 
coinage, 4,000,000,000 ; world's supply of silver, 4,000,000,000. 

With conditions as above could the United States alone maintain 
parity at 16 to 1 ? Or for a long time at any ratio — probably ? 

What are the advantages of international bimetallism ? (Jevons, 
Money, pp. 136-147, will be found helpful on this point.) 

If gold has appreciated, who have been injured? 

Is it possible to have a money in which what you sell shall be dear and 
what you buy cheap ? 

At 200,000,000 annual production of silver, how long would it take 
silver to displace the gold, thus disturbing the parity ? 

Would any depreciation of the unit occur before the parity was dis- 
turbed ? 

Make as reasonable assumptions as possible and apply to them the 
principles illustrated in the algebraic method. Section 189. 

Why fix the ratio at 16 to 1? 

Would this ratio greatly stimulate silver production ? 



272 OUTLINES OF ECONOMIC THEORY 

How about 25 to 1 ? 

Does international bimetallism depend for success on finding one par- 
ticular ratio ? 

Would the last stages of change from international bimetallism to 
monometallism present any especially noticeable features ? Would the 
cliano'e be gradual or sudden ? 



CHAPTER XX 
COMMERCIAL CRISES 

What sort of years generally precede panic times, as to (a) prices ? 
(ft) wages ? (c) speculation ? 

What sort as to (a) the creation of capital? (ft) building of houses? 
(c) construction of factories ? or (cZ) of railroads ? 

Have the people been mostly at work or have large numbers been 
unemployed ? 

Has the social product been large ? 

How about savings ? 

If prices have been high and business large, what must have been true 
as to volume of currency ? 

Has the volume of money increased ? 

Are flush times times of relatively large precious metal production? 

Or times of unusually marked tendency toward coinage of accumu- 
lated stocks of precious metals ? 

How did these high prices become possible ? 

207. We have already seen that a large share of modern 
business is transacted through the intermediary not of money, 
but of substitutes for money — through different 
forms of circulating credit, or through the book- '^^^ ^^^ °* *^''®^^* 

o 7 o as currency. 

keeping devices of deposit banks and clearing- 
houses. In local trade checks supply a large part of the 
currency demand. Drafts and bills are the media of debt pay- 
ment, not only between city and city, but between country and 
country. Only balances are paid in money, and the clearing- 
house greatly reduces this latter employment. Bank balances 
in London are paid by bookkeeping in the Bank of England. 
It is evident that all exchanges completed without the use of 
T 273 



274 OUTLINES OF ECONOMIC THEORY 

money stand witli relation to the demand for money as if tliey 
had not taken place. Not only this, but more rapid trans- 
portation has shortened the time of employment of money 
in the payment of balances. These influences together have 
worked powerfully to lessen, if not to cancel, the tendency 
towai'd appreciation in the currency unit due to enlarged de- 
mand for exchange media. The customer pays the retail 
trader by check. The retailer pays the wholesaler by draft. 
Railways and telegraphs have almost cancelled the element of 
distance in bookkeeping and payment relations between com- 
munities. Negotiable notes, bills of exchange, open accounts 
of debt and credit, all contribute to the economy of money. 
The credit system is widespread, thoroughly organized, deli- 
cately adjusted, swift, effective, and complicated. It is care- 
fully protected by guaranty organizations, by great trust 
companies, by all-powerful and all-inquisitorial mercantile re- 
porting and collection agencies. In addition to these, there are 
the investment companies, the savings banks, and the insurance 
companies, all of which are intermediaries for the gathering 
and distributing of credit. Their business is to guard the 
credit system with extreme watchfulness in protection, of their 
legal guaranties. Thus the credit system resting upon infi- 
nitely intricate relations between manufacturers, jobbers, whole- 
salers, retailers, and consumers, has for superstructure the 
many-storied fabric of deposit and discount banking, of stock 
investment and collateral borrowing, of savings and insurance 
investment, and of trust and mortgage guaranty companies. 
There are even companies to guarantee the validity of titles 
and the good faith of employes. 

208. Not all of these credit devices serve as economies in the 

use of money. Where items in open account offset each other, 

the economy is manifest. Where credit circu- 

There is a cur- ^ . 

rency and a non- lates, the economy IS manifest. But the mere 
currency form to granting of Credit, awaiting a later settlement, 
does not lessen, in the outcome, the demand for 
money, but merely postpones it. Credit must be used by trans- 
fer in payment of indebtedness before it works as substitute 



COMMERCIAL CRISES 275 

for money. Nevertheless, this non-currency element in credit 
is none the less credit, and in the making up of disaster is as 
important as any other. For, carefully inspected 
and supported as is this credit system, it is the ^^"^"^ danger- 
sheerest card-house. Its contrivances for watch- 
fulness and safety are its most shifty and unstable features. 
No fire-trap could be more skilfully planned for purposes of 
destruction, with heavy supports and girders of spontaneously 
combustible tinder wood. The whole thing is as explosive and 
volcanic as if earthquakes were built into it for walls. 

209. The period preceding a financial crisis is commonly a 
period of seemingly great prosperity. There is a popular im- 
pression that such prosperity is a mere seeming, 
and that panic is a phenomenon of necessary f^ prosperous^'^^ 
collapse. It would be going too far to claim that 
no bubbles are formed in the course of business expansion, or 
that these bubbles are not sources of financial danger ; but, 
speaking generally, the popular impression is a mistaken one. 
The years preceding panic constitute a period of great indus- 
trial activity and of great productiveness. Wage-earners have 
been well employed ; the industries of distribution have been 
in smooth and successful operation. At the close of the period 
it will be found that the wage-earning classes have rarely been 
as well housed, as well clothed, or as well fed. They are ex- 
ceptionally well supplied with the smaller conveniences and 
comforts of life. Measured by their own standard, the labour- 
ers are prosperous in pleasant homes and large personal be- 
longings. In the aggregate, they represent a large total of 
material wealth. It will be found true of the farmer that his 
farm was never under better cultivation, or his herds larger, 
his buildings more substantial or in better repair, or his home 
better furnished. Likewise of the manufacturer and the mer- 
chant ; never were there larger stocks or more warehouses burst- 
ing with merchandise. Never were factories daily pouring 
forth more goods. Turning to general conditions, it will be 
found that these prosperous years have rebuilt cities in brick, 
interlaced states and even continents with railroads, dotted the 



276 OUTLINES OF ECONOMIC THEORY 

prairies with farm liOTises, beautified them with fields of grain, 
and made them bountiful with herds. The period has been one 
of widespread plenty, of remarkable industrial activity and 
efficiency, of boundless energy and hope. It is strange, it is even 
impossible, that extensive building operations should, in them- 
selves, result in houseless exposure ; that overflowing granaries 
and fattening herds should foster hunger, or that warehouses of 
cloths should be the sufficient cause of nakedness. It is doubt- 
less true that these meshes of railroads, these cities of brick 
and marble, these immense factories and fattening herds, are 
largely the outcome of reckless hope and borrowed capital ; yet 
it all counts the world as wealth ; it is here. That the capital 
is borrowed chips nothing from this fact. 

210. The elements of danger are not to be found in the 
industrial situation, which was never before so 
d^ffl'^^r p*^^ prosperous in thorough efficiency and organiza- 

tion. The difficulty is financial. 

We have seen that the volume of exchanges is the measure 
of the demand for currency ; double the volume of currency, 
and you double prices. To halve the currency is to lower 
prices in the same ratio. These propositions are unquestion- 
able ; thej^ hardly reach the dignity of principles ; they are 
mere mathematics. Yet, strangely enough, as applied to the 
facts of industry they are seemingly untrue. Prices almost 
uniformly rise with increasing activity in business, and fall 
with failing business. This is seemingly to say that the value 
of currency falls with an increased demand, and rises with a 
failure of demand. 

The explanation is found in the fact that, with expanding 
business, the currency also expands, and, commonly, to a 
degree more than proportionate to the demand for it. This 
increase takes place not ordinarily in the legal tender element, 
but in the credit element. Eeviving credit always character- 
izes reviving business. Under existing systems, credit fur- 
nishes for currency the only element of ready adaptability. 
It furnishes, for ordinary conditions, the guaranty of steady 
market prices. It avoids an enormous application of human 



COMMERCIAL CRISES 277 

energies to the production of commodity currency. Without 
it, great expanding business operations would carry with them 
their own veto in falling prices and vanishing profits. 

But these advantages are purchased at the risk of enormous 
dangers. The commercial crisis marks the period when money 
takes on abnormal scarcity and abnormal value from the fact 
that substitute media — credit currency — contract in volume. 
The very height of the credit fabric measures the disaster of 
its fall. It is at the full tide of prosperity that the danger 
is greatest. If, then, for any reason, whether of extravagance 
at some point, or of over-production in some industries, or of 
failure of harvests in some districts, or of over-speculation, or 
even of business prosperity carried to the point of over-strin- 
gency in the loan market, there sets in a contraction of credit, 
trouble begins. The debtor can pay only by calling in turn upon 
his debtor. The pressure for payment increases in almost geo- 
metrical progression. jSlot only does credit largely disappear 
from circulation, but the burden of liquidating existing indebted- 
ness is thrown upon the legal tender and unsuspected elements 
of the currency. Panic-stricken marketings of commodities, and 
panic-stricken or speculative withdrawals of money from the 
channels of business further complicate the situation. Endless 
ruin and disaster follow ; prices tumble ; this is panic : when 
even the rich seem poor ; when business is stagnant ; exchanges 
are suspended ; labourers are unemployed and in want. Im- 
mediately preceding it were the headlong rush and exultant 
activity of prosperity, — when all men were hard at work, 
though doubtless over-confident, and possibly over-venturesome. 
And now follows the destruction of wealth. In the course of 
ample credit, things had arranged themselves in the hands of 
those who knew best how to use them. Now ensues an en- 
forced redistribution. In the outcome one man finds himself 
with two houses, and can use but one ; or with two horses, and 
needs but one ; and with endless steam engines, and trumpery, 
and stocks in trade of which he wants nothing. He can only 
let the property grow old or rot or rust. The wheels of the 
factory stand still ; industry has dropped its tools : and all 



278 OUTLINES OF ECONOMIC THEORY 

this, not because there was too little wealth, or too much, but 
because what there was was badly arranged to withstand a 
flurry in credit. 

211. It is clear enough that panic is an ebb in credit, and 
that in proportion as the intermixture of credit in currency 
Advantages ^^ large, is the disaster great. Whatever may 
disadvantages, be the ameliorations possible, the gravity of the 
and remedies. ^^^^ ^^ ^^^^ ^^ 1^^ questioned. Here is the most 

noticeably weak point in the modern competitive system. 
Anj^thing which shall offer a reasonable hope of displacing 
credit from its enormous development in modern business can 
hardly be other than a good fortune. The money of ultimate 
redemption is too small for the credit fabric built upon it. It 
is like a cone resting on its vertex. This delicate and unstable 
equilibrium is a condition constantly fraught with danger. 

Doubtless for so long as credit works, it affords desirable 
economies in the use of bullion currency and, in some measure, 
steadies prices. England succeeds at most times in managing 
a much larger per capita volume of business than does France, 
and at a much lower per capita of bullion currency. But 
periodically, England suffers acutely from the commercial 
crisis, while Erance is relatively exempt. The losses far out- 
weigh the gains. 

That which most naturally suggests itself as remedy, is to 
enlarge the currency basis, — to assume that more money of 
ultimate redemption is needed — therefore start 
is^xpansion a ^j^^ printing presses or coin silver. But remem- 
ber that it is the shape of the pyramid, and not 
the size of it, which is matter of concern. Unless there is 
found to be some tendency in silver coinage, or in any other 
form of inflation, to lessen the volume of credit relative to 
money, the inflation argument fails. 

212. There is no such tendency. Silver expansion, or any 
other expansion, would result in a proportional rise in prices. 

The degree in which credit circulates depends 
upon the methods of business and the organiza- 
tion of industry, and not upon the kind of money. So long as 



COMMERCIAL CRISES 279 

manufacturers find it advantageous to borrow capital, so long 
as wholesalers take credit from manufacturers, retailers from 
wholesalers, customers from retailers, and all deposit their 
funds in banks and pay through checks and bookkeeping, 
so long must the intermixture of credit remain an element 
of danger. In truth, the very bulkiness of silver would, in 
itself, tend somewhat to increase the inducements to deposit 
methods. 

Nor is there any great hope that these credit methods will 
cease because of their dangers. The advantages and conven- 
ience to the individual business man are too pronounced. 
Here, again, individual interests are not parallel with the 
general interest. No one business man could afford to stop 
unless all should stop, and each would gain by violating the 
rule intended for all. The remedy, if any is possible, lies in 
the discovery of a currency practicably flexible in time of 
need. This problem will afford the subject for a later chapter. 
It is possible, however, that something of ebb and flow in 
commercial affairs — of that which in philosophic phrase is 
termed rhythm — is inseparable from the conduct of business, 
so long, at least, as the industrial organization retains its spec- 
ulative features. In this view, the question is to some extent 
a psychological one. 

Suggestive Questions 

Would it prevent panic if money were all gold ? Or diamonds ? Or 
if the commodity currency were doubled in volume ? 

Would a large money volume prevent the use of credit ? 

Do you see any way to prevent the granting of credit, or the use of 
credit as currency ? 

Do you see any way of increasing the amount of legal tender or of 
credit currency at the acute period of panic ? 



CHAPTEE XXI 

TARIFFS, TAXES, AND PRICES 
(Teachers may well omit this chapter) 

213. An analysis of the bearing of tariffs and other taxes on 
prices is a matter of extreme complexity. Eoscher explains, 
First effects of ^^^ part, the fall of prices in late years by the 
restriction of tariff barriers established between different coun- 
^^ ^' tries. This he illustrates by supposing the 

extreme case that each community should erect prohibitive 
barriers against all imports. A fall in the prices of those 
products formerly produced for export would result, and a rise 
in the prices of products previously obtained through importa- 
tion. And he seems to regard it as clear that the tendency 
toward fall would preponderate (System, Book III. c. 5; 
Sec. 139 n. 11). It is unquestionable that these two tenden- 
cies would be developed, but it is not so clear upon which side 
the balance would rest. A lessened aggregate production of 
utility would result, and a lessened dividend for each com- 
munity. An increase, then, instead of a decrease in prices 
would take place, if the decrease in the social dividend were 
not accompanied by a diminished circulating medium. In the 
case of a community producing the currency commodity we 
should expect to find a rise in prices, by reason of the export 
of 'this commodity being prevented. If, on the other hand, 
the case be one of a community importing its currency com- 
modity, the conclusions are not so ready. The final effect 
would unquestionably be a fall in prices; but the first effect 
might well be a diminished social product without material 
modification in the volume of currency. A rise in prices of 

280 



TAlflFFS, TAXES, AXD PRICES 281 

commodities formerly imported, — other than the currency- 
commodity, — and a fall in the prices of those commodities 
formerly produced for export, would be expected. The closing 
of the sources of currency supply would make itself felt but 
slowly in the general tendencies of prices. Until this effect 
should become marked, the case would be one of diminished 
aggregate production, and substantially undiminished cur- 
rency. A higher average of prices would be a necessary ac- 
companiment. 

The final effect of prohibitive barriers upon the average of 
prices in different communities, considered in the aggregate, 

is altogether coniectural, until the effect upon 

1 ^- i ^v. T^ T Final effects. 

the production of the currency commodity has 

been determined. We may assume that the first effect would 
be an average rise in prices, this rise being especially marked 
in the communities producing the currency commodity. 
Where, as under existing conditious, the production of the 
currency commodity is confined to a few communities, the 
final effect must be an average fall in prices consequent upon 
the necessary change of a large portion of productive energies 
from the production of the currency commodity to the pro- 
duction of other commodities. 

214. But turning to conditions as they exist, we find that 
trade barriers are partial instead of prohibitive. It is by no 
means clear that existing barriers do in fact cause a realign- 
ment of marginal sacrifices or appreciably affect the total 
production of the currency commodity relatively to the other 
commodities, or so far impede the interflow of the currency 
commodity between communities as to modify by this means 
the average level of prices. And if the production and circu- 
lation of the currency commodity are in an appreciable degree 
modified, it seems probable that the tendency from this cause 
toward lower prices is more than offset by the tendency toward 
higher prices consequent upon a diminished world-production 
of utility. 

215. We have considered the effects of taxation on values. 
We have now to recall that price is an expression of the value 



282 OUTLINES OF ECONOMIC THEORY 

of the currency commodity. No tax on the production of the 
currency commodity will then modify prices unless it work 
Taxes on pre- ^ rearrangement in the proportions of pro- 
cious metal ductive energies applied to other commodities, 

pro uc ion. Imposition of a tax upon the production of all 

commodities other than the currency commodity would, in 
some measure, diminish the production and consumption of 
the taxed commodities. (See Section 156.) The tendency, 
then, of such taxation would appear to be toward a larger 
production of the currency commodity at a lower market value 
of the currency commodity, and at higher prices of the taxed 
commodities. 

The tendency toward larger production of the currency 
commodity would, however, be less marked than at first 
thought seems probable. The revenues collected by taxation 
are commonly expended either in compensations to govern- 
ment employes, or in payment of interest on the public debt. 
In either case, the result is a subtraction of productive ener- 
gies from the creation of exchangeable goods. To this extent 
exchanges are lessened, and the demand for the currency com- 
modity for currency purposes thereby decreased. A tendency 
toward higher prices, that is to say, toward a lower value for 
the currency commodity, results. 

Thus we may conclude that a system of taxation bearing 
upon all commodities other than the currency commodity 
would tend in two ways toward higher prices (lower value of 
currency), first, by diverting a proportionally greater quantity 
of productive energies to the production of the currency com- 
modity; second, by reducing the demand for currency pur- 
poses of the currency commodity, thereby diminishing its 
total production and probably permitting a lower marginal 
sacrifice in production. 

216. A general tax upon the production of commodities, 
inclusive of the currency commodity, would tend in some, 
though in smaller degree, toward a readjustment of values. 

There are differences in the measure in which a demand for 
different commodities is retired by increase in price. An equal 



TARIFF, TAXES, AND PRICES 283 

rate of taxation upon all commodities must therefore inevita- 
bly disturb the established application of productive energies. 
It is not clear in what degree an increase in the value of gold 
would retire the demand for gold for non-currency uses. We 
may, however, assume that this retirement would not be excep- 
tionally great or small. But general taxes exercise upon the 
currency commodity an indirect effect, which other commodi- 
ties do not experience. Taxation of other commodities tends 
directly to reduce the demand for these commodities. This 
reduction of demand is, in itself, an indirect reduction in the 
demand for the currency commodity, and therefore tends 
toward a rise in prices. 

217. We have now to remark that none of the conclusions 
reached in the last four sections are trustworthy for other than 
theoretical purposes, since there is one class of 
utilities which commonly, and in large degree in- ^eidTn m^d * ^^ 
evitably, escape taxation; these are the utilities 
indicated under the term "services." A system of taxation 
which should so bear upon profits, wages, rent, and interest 
as to cause no readjustment in the applications of productive 
energies, would involve no changes in market values. Whether 
or not such a system would be an ideal one, we do not at pres- 
ent need to discuss, since it is evidently outside the reach of 
human ingenuity. But, in fact, the goods termed " ser- 
vices," and the wage-earnings of labourers occupied in the 
production of these goods, are commonly unburdened by 
taxation. Utilities of this class are important items in the 
expenditures of the average man. Taxation which does not 
directly bear upon this class of goods must, of necessity, 
result in relative increase of production and consumption in 
these lines. 



POLITICAL ECONOMY AS AN ART 

(Re-read Section 3) 

CHAPTEE XXII 
THE COMPETITIVE SYSTEM 

218. If one will carefully examine a map of the world, 
he will be struck with the fact that most of the great cities, 
The new impor- ^^^ especially the cities of the New World, are 
tance of trans- located at points of advantage for water trans- 
portation, portation. There is not a great city on the 
Western Continent which does not lie upon ocean, lake, or 
river. And yet the western cities have in the main been built 
since the era of the railroad, bringing with it the fall in rela- 
tive importance of water transportation. In the Old World, 
on the contrary, where almost all cities were planted in the 
days of water transportation alone, one yet finds large cities 
like Berlin and Paris located at large distance from any prac- 
ticable waterway. It is true that cases of this sort are rare, 
but it is strange that they should have been less rare before 
the days of the railroad than since. It is true that St. Louis 
makes small use of the Mississippi. Kansas City and Omaha 
have no important water traffic. The river boat is mostly a 
matter of the past. The cities, nevertheless, have somehow 
grown by navigable streams. 

The explanation is in the fact that the question of trans- 
portation has become the all-important one in the trade and 
commerce of this century. Up to the time of the application 
of steam to land transportation, the world knew only two sorts 
of great cities, — the political city, and the trade city by the 

284 



POLITICAL ECONOMY AS AN ART 285 

water-side. The political city was seldom of great size unless, 
at the same time, a trade centre; this latter it could not be, 
unless ships could anchor in front of it. The inland city was 
of necessity the trade centre for but a small territory; and so 
it is instructive to note the development of the populations of 
Berlin and Paris since the era of steam transportation. 

Berlin in 1817 contained 188,000 inhabitants. 

" 1844 " ..... 311,000 " 

1871 " 825,000 " 

" 1890 " 1,-300,000 " 

Paris in 1806 " 580,000 " 

" 1817 " 714,000 " 

" 1836 " 909,000 " 

" 1856 " 1,174,000 " 

" 1872 " 1,852,000 

" 1890 " 2,800,000 " 

Large numbers of men cannot live in one city unless that 
city can sell and buy over a wide range of territory. With 
steam there came advantages for the clustering of allied indus- 
tries, by reason of the opportunity to procure trained workmen, 
to obtain the necessary materials and supplies, to buy in large 
quantities and at need, and to sell to other manufacturers direct 
or to wealthy and widely connected distributing merchants. 
The larger market made possible the larger production at 
one centre. This large production, and the applications of 
steam to industry, made the giant factory possible. Close 
competition over wide fields; the disappearance of the small 
employer, of the workshop, and of hand industry; the rise 
of the great factory, with its impersonal relations between 
employer and workmen — are the salient facts of the new 
industrial era. 

219. All this was inevitable; steam brought it, and 
the progress of discovery and invention have served but 
to emphasize it. How much of good or ill steam is the 
has come with the change is difficult to deter- cause. Are the 
mine. The antagonisms between employer and ^ ^'^ ^ 2°° 
employe have mostly come of it. When employers worked 



288 OUTLINES OF ECONOMIC THEORY 

side by side with their artisans and apprentices, there was 
room for more of neighbourliness and sympathy, with less of 
actual clash in interests and greatly less of apparent clash. 
With but half a dozen or a dozen men in a shop, the gulf of 
separation between employer and employe was as narrow a 
quantity economically as it was socially. It was reasonably 
within the hope of any apprentice to become a master. In 
the nineteenth century system, it is inevitable that 499 out of 
every 500 industrial workers shall be underlings. The places 
of leadership are few. 

When many artisans worked independently and the proc- 
esses were hand processes and the workshop manned with 
scarcely teii workmen, each artisan was commonly master of 
the entire art and mystery of his occupation, instead of, as 
now, the specialized performer of some half-dozen movements 
or the facile attendant upon some great machine. 

As producers and consumers have moved more widely apart, 
the personal relations of trust and honour have decayed, prices 
and not makers have come to rule, processes have multiplied 
for adulteration and scamping, and advertising has developed 
into the science of lying by newspaper. 

It is easy to subtract something from the strength of these 
facts. It may be that there are more than sufficient advan- 
tages in the age of steam to outweigh the losses of change. 
How much, for example, steam should be credited for the 
establishment of international division of labour, for the peace- 
ful tendencies of international intercourse, in what degree we 
shall consider modern industrial development to have set aside, 
with imperial wars and bickerings, the kings and their trum- 
petings, to make way for the people and popular government 

— how much modern life owes of its fulness to the new 
industrial influences making for science and culture and wealth 

— we may not readily estimate. 

If the labourers have swung wide of their employers socially, 
they have multiplied and strengthened the ties of association 
with each other. If greater divergence of interests has seemed 
to result between employers and employes, it is a mere seem- 



POLITICAL ECONOMY AS AN ART 287 

ing, which must pass away with better intellectual grasp of 
the more complex modern conditions. If the workman no 
longer needs to be a master in all branches of his trade, he has 
been freed from long apprenticeships and profitless acquire- 
ments. The automatic working of his machine and the sim- 
plicity of his short processes, leave him as free as is the leisure 
man for thought and reflection. If the workman has lost in 
the factory something of independence and hopefulness, he 
enjoys as one member of society his gain in the greater effi- 
ciency of labour, — his share of a larger social dividend, — and 
there always remain to him, on the terms of his old remunera- 
tion, his separate bench and last. 

220. Had the labourer the opportunity to choose between 
the lower wages and the limited life of the „ 

° Commercial 

eighteenth century on the one hand, and the crises mostly 

wages and opportunities of the nineteenth on peculiar to the 

era of steam, 
the other, the choice would not be found a 

ready one ; for there are some aspects of the case which we 

have not yet examined. 

Let it be assumed that the higher wages are an important 
advance in well-being, despite the larger needs and higher 
social requirements to which the labourer is now subjected. 
How about the uncertainties, the chancefulness of employ- 
ment — the risk of want of work and the possibility of star- 
vation which the modern system fosters? The commercial 
crisis is mostly a product of steam, also ; it is, at all events, 
an incident to the intricate and highly organized societies of 
the modern era — to the wide application of division of labour. 
Interdependence is the law of specialization. Each commu- 
nity not only suffers its own ills, but vibrates in sympathy 
with the disasters of all associated communities. In the mat- 
ter of fires, it is well to have tinder-boxes at goodly distances 
from each other. 

The most acute of all the evils of the present social organi- 
zation is this of irregularity and uncertainty of employment. 
Cure the disease of panics, and the labourer will not greatly 
quarrel with his lot. The employer is equally poAverless ; but 



288 OUTLINES OF ECONOMIC THEORY 

the employer need not beg or starve. The commercial crisis 
means the wholesale loss of hope, independence, and self- 
respect ; the wholesale creation of beggars, wanderers, thieves, 
and criminals. 

All this is serious enough, and yet there is more to be said. 
It may well give us pause before the tendencies of modern 
civilization. All this, with the more which might be said, 
and is commonly said, in attack upon the present social order, 
is interesting and profitable in an effort fully to understand 
the present conditions. But admitting for a moment the ill 
comparison of the present with the past, nothing much seems 
to follow from it. We cannot go back. The railroad and the 
steamship, the science and the knowledge, the credit system 
and the machines, are here to stay. Thus in placing the 
present industrial order on trial for its continuance, it need 
form no part of the indictment that it is worse than some one 
or all of the systems which have preceded it. The question 
lies not between what was and what is, but between what is 
and what may be. 



THE ECONOMIC HARMONIES 

221. One gets no great distance into economic discussion 
in its practical aspects, without encountering what the partici- 
pants in the discussion call the social question. It is perhaps 
not worth while to inquire too closely into the meaning of this 
term. Those who use it could commonly do little more in 
the way of definition than to repeat it. It means different 
things to different people. In a general way, however, it is 
the question of what is the matter — with more or less definite 
reference to some one or other scheme of remedy. 

The fact, however, that with most earnest and reflective men 

the conviction grows that there is a social question — whatever 

the term may mean, or however obscure or vari- 

question^ ^°"^ ous may be its meanings — is in itself a startling 

fact. The doctrines of political economy no 

longer ring with confident assurance. Long asserting that 



POLITICAL ECONOMY AS AN ART 289 

whatever is, is right, has seemed to put in issue whether what 
is not, is necessarily wrong ; whether there is any liope of 
progress for the race; whether ojDtimisni best rests in satis- 
faction witli what is, or in confidence of what is to come. The 
economists of tlie first half of the century were engaged in 
the study of societies emerging from centuries of kingship, of 
government by classes, of stupid and unjust legislation. It 
was clear enough that the progress of society 

lay in the breaking down of legal barriers and '^^^ ^^"^^^ °p*^" 
^ o o mism. 

limitations, in the sweeping away of the privi- 
leges of caste and class, and in the development of popular 
institutions under the form of local and individual initiative. 
The time was one of growth and advance. A wealth of achieve- 
ment justified the advocates of industrial liberty as theorists 
and honoured them as prophets. The era was a series of object 
lessons in the blessings of untrammelled individual activities 
and in the dangers of over-legislation and paternalism. The 
benefits of increased freedom argued for the wider abolition of 
regulation, and the regime of liberty came to stand as the ideal 
toward which civilization seemed to tend. For most cases, it 
was manifest that what individuals and peoples chiefly need 
is to be let alone ; that that part of human ill is small which 
kings or parliaments can cure. In the full flood of hope, 
economists argued learnedly that the good of each is always 
and inevitably bound up with the good of all; that in the 
marvellous divine order of things, selfishness of motive works 
out in altruism of results ; that social ill-adjustments are due 
to too little liberty, too much meddling, or to ill-informed 
estimates by the individual of his own interests. Bastiat, for 
example, proclaimed with all the resources of his marvellous 
ingenuity and eloquence that "All legitimate interests are 
harmonious," and pointed out that, this once proved, nothing 
remained but to enlighten the people in their freedom — that 
the future could not lie with restraint, but with liberty informed 
with knowledge. 

222. It is hard to determine how much this school of 
thinking owed to pure idealism in ethics, how much -to the 



290 OUTLINES OF ECONOMIC THEORY 

teachings of experience in purely economic lines. It does not 
come easily to the reverent mind to believe that the best inter- 
Largely an ®^^^ o^ ^'^y ^^^^ antagonize the interests of all, if 
ethical concep- only it be possible to the individual to appreciate 
things in their ultimate meanings and their long 
effects. Somehow each of us meets the faith in him that, could 
he see things far-sightedly and clearly, self-love and fellow- 
love would find themselves reconciled in the moral code as it 
daily enacts itself in the human conscience. The right of the 
neighbour can hardly be wrong to us ; the claims of sympathy 
and the demands of duty not only express our obligations to 
our fellow-beings, but sum up in highest and truest sense our 
own well-being. Somehow the right thing must be the best 
thing for each of us ; it cannot do our neighbour wrong, it must 
be best for him as for us. 

This, then, was Bastiat's first principle — a brave and noble 
faith — that all true interests must harmonize; any clash must 
be a mere seeming, or somewhere real interests have been mis- 
conceived. Notice, however, that Bastiat did not say that all 
interests are harmonious, that all selfish activities make for 
the common good, but that all legitimate interests are har- 
monious — which is as much as to say that all justifiable selfish- 
ness works for the common good — no great discovery, after 
all, since all selfishness which makes for the common good is 
by that very fact justifiable. Subjected to strict analysis also, 
to say that all self-seeking within the limits of good morals 
must profit the general well-being does not advance the argu- 
ment, since the very test of right action is in this, that it shall 
result in no harm to the general well-being. 

So, again, to say that only right action can be consistent with 
the best interests of the actor holds only when one assumes 
that no outside advantage can balance the inner ill which 
comes from violation of the dictates of conscience. Dishonesty 
is not necessarily bad policy, if measured merely in outside 
results. The doctrine of the economic harmonies, if of any 
weight for practical purposes, must be interpreted to assert 
the coincidence of individual and social interest without refer- 



POLITICAL ECONOMY AS AN ART 291 

ence to the purely personal meanings of right action simply as 
such. Our question is whether it is possible that a human 
being intellectually perfect, but lacking in the tendernesses, 
aspirations, and repugnances of conscience, should ever find it 
to his interest to do his fellow-man an injustice — to steal 
from his employer, cheat his creditor, overcharge his clients, 
oppress his employes, weave shoddy into his fabrics, enter into 
combinations for buying and trusts for selling. It is idle to 
say that, if he does these things, others will, also. Possibly 
enough — and so they will if he does not; and even did his 
lack of restraint lead them to follow, the monopolist is only in 
slight degree robbed of his profit, or the thief of his plunder, 
by the fact that other men ply the same trades. 

This laissez-faire (don't interfere) school, these advocates 
of liberty, claim too much, even were it not true that in 
human shortsightedness men constantly fail to see their true 
interests to be parallel with the general interests, when, in fact, 
they are so. Perfect liberty of action will be a practicable 
system, when men shall have come to possess that acute sym- 
pathy for others — that fine regard for the well-being of one's 
fellows — which makes an injury to another an echoing injury 
to each, and when the intellectual powers have been developed 
to the position of an adequate aid and guide for the conscience. 



LAISSEZ-FAIRE 



We find ourselves confronted by the sweeping doctrine that tlie sole 
function of an ideal government, in relation to industry, is simply to 
leave it alone. This view, in some minds, seems to be partly supported 
by a curious confusion of thouglit ; the absence of governmental inter- 
ference being assumed for simplicity's sake in the hypothetical reasoning, 
by which the value of products and services are deductively determined, 
is at the same time vaguely regarded as a conclusion established by such 
reasonings. — Sidgwick, Principles^ p. 399. 

Now, I beg you to remark the strange assumptions that underlie this 
reasoning. Human interests are naturally harmonious ; therefore we 
have only to leave people free, and social harmony must result ; as if it 
were an obvious thing that people know their interests in the sense in 



292 OUTLINES OF ECONOMIC THEORY 

wliicli they coincide with the interests of others, and that knowing them 
they must follow them ; as if there were no such things in the world as 
passion, prejudice, custom, esprit cle corps, class interest, to draw people 
aside from the pursuit of their interests in the largest and highest sense. 
Here is a fatal iiaw on the very threshold of Bastiat's argument ; and it 
is a flaw which no follower of Bastiat has repaired, — which, for my part, 
I believe to be irreparable. Nothing is easier than to show that people 
follow their interest, in the sense in which they understand their inter- 
ests. But between this and following their interests in the sense in 
which it is coincident with that of other people, a chasm yawns. That 
chasm in the argument of the laissez-faire school has never been bridged. 
The advocates of the doctrine shut their eyes and leap over it. 

— Cairnes. 

The modern era has undoubtedly given new openings for dishonesty 
in trade. The advance of knowledge has discovered new ways of making 
things appear other than they are, and has rendered possible many new 
forms of adulteration. The producer is now far removed from the ulti- 
mate consumer ; and his wrong- doings are not visited with the prompt 
and sharp punishment which falls on the head of a person who, being 
bound to live and die in his native village, plays a dishonest trick on one 
of his neighbours. — Makshall, Ec. of Ind., p. 7. 

Thus, for instance, there is no reason why, even in a community of 
most perfect men, a few wealthy land-owners, fond of solitude, scenery, 
or sport, should not find their interests in keeping from cultivation large 
tracts of land naturally fit for the plough or for pasture ; or why large 
capitalists generally should not prefer to live on the interest of their capi- 
tal, without producing personally any utilities whatever. 

— SiDGwicK, Principles, p. 404, 

In the first place, then, as you will anticipate, the doctrine, laissez- 
faire laissez-aller, is impracticable in cases where the present situation is 
directly traceable to the action of that government or administration 
which has been permitted or encouraged to commit the mischief. No 
question is indeed more difficult in the whole range of the ethics of social 
life . than the modern doctrine of vested interests. It is obvious that if 
you were to extend the principles which some persons have laid down, we 
must persist, even in the near prospect of national ruin, in continuing in 
what we have once allowed. If Charles II., for example, had given the 
son of Louisa Querouaille, the French prostitute and spy, the whole rev- 
enue of the town, we should be obliged to go on paying the proceeds to 
the Duke of Richmond. If it be true that the bounty and the corn laws, 
as many contended, were as much the inheritance of the English land- 
owner as his acres were, no reforms could have been permitted. If, on the 



POLITICAL ECONOMY AS AN ART 293 



other hand, mainteiiance out of the rates were, as was alleged, the abso- 
lute right of the British labourer, in consideration of his having been 
ousted, without a compensation, from his commonable rights in the land, 
occupiers would have been bound to keep paupers until they became 
paupers themselves. 

. . . The strength of socialism is the injustice of government : it is 
weakened by every act of equity, and becomes an extinct or at least 
dormant force when all rights are respected. 

— Rogers, Ec. Int. of Hist., pp. 251, 252, 



LAISSEZ-FAIRE AS AN ETHICAL SYSTEM 

223. Underlying all the opposition to socialism as an 
economic scheme, there is probably an element of antagonism 
resting in purely ethical conceptions. The purpose of our study 
is mostly to examine the bearings of economic principles upon 
questions of political and social interest. It is, however, not 
the less, but the more necessary to survey our field of investiga- 
tion carefully, and to mark off the limits of the purely ethical 
side of the inquiry. We must, if possible, guard our path 
from occasions for digression, by setting aside from our dis- 
cussion those aspects of the question upon which political 
economy can throw no helpful light. 

The individualist holds one opinion in a fashion almost 
deserving the dignity of a great moral idea. He distrusts all 
schemes for social amelioration containing in them any ele- 
ment of force. How they may fail, or when, he may not see; 
but, no matter how fair the outlook, he is convinced that they 
will somewhere fail as applied to the complex conditions of 
society. Human nature is, as he thinks, somehow safe to 
bafile them. 

This is in essence the opinion, perhaps rather the feeling, 
of a great body of liberal and earnest thinkers, — that the 
socialistic idea, after all possible has been said in favour of it, 
must yet remain as a system inherently weak because funda- 
mentally in denial of the ultimate principles of the moral code. 
Somewhere, then, they think a latent flaw — some leak — must 



294 OUTLINES OF ECONOMIC THEORY 

surely develop itself in any scheme of social reorganization 
whose first principles violate the sanctity of individual rights. 

This ethical side of individualism has, in its compactness 
and simplicity, an appealing quality to the reason. Each 
man's rights over his neighbour are asserted to flow from his 
own right to liberty, to security, and to the enjoyment of his 
property. From these absolute rights must be derived all 
rights of enforcement. When the first meeting of men took 
place in the primeval forest, these questions of right first took 
on a relative aspect. Either man might have said to the other, 
I want nothing of you; leave me alone. I will not molest 
you. I will go my way in safety unmolested by you. The 
world is wide for both of us ; go you your ways. This first 
man's just claims to control the second must have been limited 
to mere rights of enforcement — to the use of such methods 
as should be reasonably necessary to make the primary rights 
effective. 

That the world has become densely populated changes in no 
manner these ethical relations, but merely makes their appli- 
cation and adjustment more complex and difficult. Some 
paring down of claims to property and liberty must take place, 
in order that the largest aggregate of liberty and initiative 
shall be preserved. It is in this process of adjustment of 
conflicting claims, and in maintenance and protection of such 
adjustments as are established, that the province of legislation 
and the purpose of government are found. The rights of 
society are the aggregate of individual rights. All powers of 
enforcement are the summed-up powers of the individual 
members. If no member has other than a self -protecting 
jurisdiction over his neighbour, society, organized as a state, 
must fail of possessing other than protective functions. 

224. It is worth noticing, however, that to admit the 

necessity of a government of any sort involves the assumption 

that human interests, as conceived by human 

anarch^^*^ beings, are not in strict harmony. Nor for 

practical purposes is it sufficient to reply that 

men misconceive their own interests, since in any case it 



I 



POLITICAL ECONOMY AS AN ART 295 

remains true that entire liberty must fall short of the best 
possible adjustment of social interests. Again, this system of 
individualism, reared upon strict ethical conceptions, fails to 
justify the State in even its minimum of activity — really 
denies all justification for a government of any sort. As cm 
ethical doctrine, it leads logically and inevitably to anarchism. 
The individualist condemns higher education at public expense 
as a misappropriation of funds; public railroads, waterworks, 
telegraphs, as an unwarranted coercion of individuals into a 
business venture. These things are said to fall within the 
exclusive sphere of consent and contract. They are not pro- 
tection to anybody in his ultimate rights. IS'o one has the 
right to be educated or transported, or to have his property or 
his thought transported, or his thirst slaked, at my expense. 
These things are rather transfers of benefits. If I interfere 
with another's rights, he may properly coerce me. He must 
not compel me to minister to his Avell-being. ISTo one need 
misunderstand this distinction — nothing could be clearer. So 
when X asks me to restrict my freedom or to contribute from 
my pocket-book for the benefit of his woollen mill, I am dis- 
posed to refuse, and if he gets the legislature to command it, 
I pay under protest. If I am told that this is for my benefit 
also, I reply either that I do not believe it, or that, in any 
case, that is my business and not another's. Nobody has been 
authorized by me to tax me for my benefit. 

The difiiculty with all this, however, is that the case is 
exactly the same with all the functions of government. When 
X asks that Y should not injure him and takes measures to 
prevent it, I approve ; but when X by himself or through the 
government requests me to contribute to the process, I urge the 
strict parallel for my purposes of X's woollen mill with X's 
head. If he values either, let him protect it. 

This is sheer anarchism — the denial of all right of taxation 
— the reduction of government to a system of voluntary 
cooperation. 

And here we have in hand the material for some important 
definitions. The consistent anarchist carries individualism to 



296 OUTLINES OF ECONOMIC THEORY 



n 



the extreme of perfect liberty, advocating voluntary coopera- 
tion or nothing. The socialist is the complete antithesis, 

the advocate of a general system of compul- 
Some definitions. .. -^^ ,. i -r-, i t 

sory cooperation. Democratic and Republican 

schools are found within these two extremes — the democrat 
tending toward the individualist idea, the republican toward 
the enlarged powers of the State. " Socialistic " suggests a 
verging from the present conditions toward larger state activi- 
ties. Socialism, as a system, contemplates all productive and 
distributive processes as functions of the State. 

225. The opinion grows among students of these questions, 

that the limitations of state activity must be established upon 

grounds of utility — upon considerations of ex- 

A priori method pediency — and not at all, or at all events not 
fruitless. ^ '' ' 

fundamentally, on grounds of abstract moral 

right. That form of government which strikes us as ideal 

— as consistent with absolute ethical standards — would not 
fit the imperfect mental and moral conditions of the present. 
That government is fit for us — best under the circumstances, 
relatively right — which we are fit for. Primitive societies 
Avould go to wreck under republican institutions. Whether 
or not abstract moral ideas are more than generalizations of 
expediency fixed in the human mind from a long race history, 

— our moral concepts being merely the summary of past- 
proved utilities to the race, — at all events, no philosophy of 
morals can ignore the fact that whatever forces or sanctions 
may underlie moral notions, only those conceptions which 
have served the well-being of the race have tended to survive. 
Those peoples holding notions antagonistic to race welfare 
have tended toward disappearance. The persisting dictates 
of conscience are, then, the inbred register of those ideas 
which, pursuant to the very nature of right action, have 
proved themselves of benefit to the race. They furnish safe 
guides for human conduct, in so far as the circumstances at 
hand do not present novel conditions and new questions. In 
any given case and for any particular question, it is vastly 
improbable that a new moral measure, or a new ethical con- 



POLITICAL ECONOMY AS AN ART 297 

ception, is safe, or will ever become consistent with human 
well-being. Nevertheless, it is equally true that moral intui- 
tions, the dictates of conscience, have been subject to change 
in the past and will in the future change in some measure for 
some lines of human conduct. Those moral ideas, for exam- 
ple, on which the very existence of a warlike tribe depends — 
ideas which must then be registered in the average conscience 
of the people — are not suited to the conditions of an indus- 
trial society, and would tend to work not merely the disrup- 
tion of the society, but the destruction of the race. As soci- 
eties advance, moral conceptions undergo modification. As 
the necessities of our civilization change, the moral code must 
change to necessary correspondence — change, however, for 
the most part, by expansion and extension of those ideas now 
generally held as moral and apparently definitely and intri- 
cately interwoven with the well-being of society. 

Upon this abstract notion of justice, and upon different 
interpretations and extensions of it, rests most of the etliical 
opposition to socialism. But it must be recognized as possible, — ■ 
it is not prima facie probable — that our present idea of justice, 
and particularly our extensions of it by logic and analogy, 
may in the development of the race undergo important modi- 
fications. That for present necessities the dictates of con- 
science are to be regarded as registered rules deduced from 
the past for the well-being of the race, does not imply that the 
future well-being of the race will of necessity be associated 
with these rules. And yet, when there is found a moral con- 
ception as firmly established as is this of justice, as clearly 
upon the increase in definiteness and breadth of application, 
and as fundamental to social existence in all highly developed 
societies, we must admit the probability that larger applica- 
tions of it will accompany further social progress, and we 
must assent to the improbability that any system repugnant 
to this conception will prove for any long period of time to be 
of advantage to civilization. 

226. On the other hand, it must be borne in mind that 
the extension of state activities in the direction of socialism 



298 OUTLINES OF ECONOMIC THEOEY 

does not, iu fact, strike the average human conscience as a 
question of morals in any sense. To regard the case as a moral 
one is mostly peculiar to those who, proceeding from cases in 
which the conscience dictate is clear for all men, have rea- 
soned thereon by analysis and comparison. Morality is not in 
origin, or largely in mental processes, a matter of analogy or 
reason. Proposals which do not offend the general moral con- 
sensus must be hesitatingly condemned, even if to the view of 
the trained intellect they appear to be inconsistent with logical 
and analogical extensions of abstract moral ideas. 

As the outcome of this phase of the discussion, we may 
conclude that the ethical line of approach is neither very 
helpful nor altogether trustworthy; that the justification for 
government is neither to be sought nor found in abstract 
moral conceptions, but in the necessities of race existence in 
view of conditions as they are; and that by the moral test 
socialism does not stand condemned, although fairly subject to 
an unfavourable presumption. Any particular measure tend- 
ing toward enlarged state activities is not to be condemned 
upon that ground alone, but is to be examined upon its merits 
as a question of expediency entirely apart from questions of 
tendency. 

We may, at the same time, as does for himself the writer, 
retain our faith in the general tendencies of liberty as against 
restraint; our trust in individual initiative, in local govern- 
ment, in decentralization, and in strict constitutional construc- 
tion ; our belief that there is danger of too much rather than 
of too little government, and our conviction that in all cases 
of doubt, opinion should incline toward non-interference. 



HISTORICAL ASPECTS 



227. Still arguing about the edges of socialism, we find 
ourselves at these intermediate conclusions, — that it does not 
greatly matter to the argument that the conditions of one or 



POLITICAL ECONOMY AS AN ART 299 

three hundred years ago may have been more fortunate than 
those of the present; that laissez-faire, either as a scheme 
for practical government, or as a system of ethical theory, will 
not serve in rigid and consistent applications ; but that for 
purposes of presumption and prophecy, the ideal of liberty 
has some indefinite value. 

We may go somewhat farther than this in mere presumptive 
condemnation of socialism. While we are not able to follow 
the individualist in his apriori condemnations of 
restraint and in his idealistic assertions of human 
perfectibility, we yet must believe that, as long as men live 
together in society, they are likely to become better adapted to 
social conditions. As mere matter of correspondence to envi- 
ronment, the high moral requirements which the present social 
organization makes, if it is to run smoothly, will tend in larger 
degree to be fulfilled as the present organization continues. 
A presumption, therefore, exists against any system which 
seems to run counter to the main currents of civilization, and 
to be destined to abandonment at some, though possibly a dis- 
tant time, in the forward movement of humanity. Neverthe- 
less, as a temporary expedient, it may well be that the system 
of socialism is best for the present emergency. 

228. Turning from these ethical aspects of socialism, some 
perplexing questions of historical development present them- 
selves. The socialist is convinced that the Tendencies in 
streams of tendency are with him. Humanity history, 
has met a new set of conditions during the last hundred years. 
Steam in the factory and steam for transportation on land and 

sea, together with the developments of this cen- 

. ^ . One side, 

tury m the science and technique of industry, 

have, in bringing the great cities, the great factories, and the 
great employers, brought in their train, as one further stage 
of development, the monopolies, the trusts, the pools, the 
world-wide tendency toward world-wide combination. Four 
men together are said to be in practical control of the rail- 
roads of the United States, which are nearly half the railroads 
of the world. Competition is destroying competition; com- 



300 OUTLINES OF ECONOMIC THEORY 

bination is the inevitable outcome. Monopoly profits turned 
in part toward sinking funds for cut-throat competition, have 
already destroyed the very fibre of the present industrial 
organization. If the government will not absorb the monopo- 
lies, the outcome will not be very different in the absorption 
by the monopolies of the government. 

Not only this, but the grooving strength of law and order 
and organization in the world, the constant reaching out of the 
State toward new industrial fields — the railroads and tele- 
graphs in Europe, the postal service over almost the entire 
world, banking interests in large measure, and the coining 
function generally — present themselves to the socialist as 
tendencies in his favour. -More than all this, the tendency 
of democracy toward extension of the powers and functions of 
the State is so marked as to have roused the apprehensions of 
far-sighted opponents of socialism. All Europe, even Eng- 
land, is striving against the rising tide of state insurance, 
state charities, state savings banks, state regulation of the 
trades, state supervision of shops and factories, state arbitra- 
tion by compulsion, state tenement houses. The socialist 
rightly perceives, in the development of political power among 
the masses, his best hope of triumph. If socialism comes, it 
will come ushered in by democracy. 

229. The individualist, on the other hand, finds something 
of an argument for his side of the case. Indeed, one always 
finds facts enough for his own side to make a 
respectable argument, if he carefully leaves 
out all that is inconvenient. It is called to mind that the 
history of civilization is the story of the decay of tyranny 
and the growth of liberty, of the breaking up of military 
despotisms and the substitution of free commonwealths of 
industry, of the change from kingship to manhood suffrage 
and representative government. The individualist argues, 
also, that under the regime of free contract and individual 
initiative, the world has progressed beyond parallel at any 
other time ; that under the stimulus of private interest, have 
resulted a long series of the most glorious triumphs of human 



POLITICAL ECONOMY AS AN ART 301 

thought and energy; that these have come about in human 
societies very nearly in proportion to the degree in which 
individualism has been developed; and that not only have 
these achievements covered those departments of activity most 
closely connected with personal interests, — for example, thes 
applications of science to industry and to methods of organiza- 
tion in business, — but have also, and in nearly equal degree, 
extended themselves into the .realms of philosophy and art 
and abstract science. In fact, one touches no levels of lower 
achievement in passing from the most practical of human con- 
cerns to subjects like biology and psychology. There are no 
evidences of paralysis in literature, sociology, or speculation. 
The forces of individualism seem in no wise exhausted in the 
fields of higher education, religion, and philanthropy, or even 
in the earnest scientific examination of the claims of socialism. 
These last one hundred years of liberty have been at once the 
very flowering and fruiting time of human history. The 
student of it is even inclined to wonder how long this mar- 
vellous rush of things can last, and whether when it ceases it 
may not indeed be socialism which is to follow as a close of a 
wonderful era — coming like the dead leaves after harvest, or 
as the gathering ashes over waning fires. The earnest observer 
is inclined to give more than the expected weight to the argu- 
ment of the individualist, and to query whether civilization 
has not grown top-heavy in material and intellectual progress ; 
to believe that a period of comparative lethargy is necessary 
in which the race shall gather new forces and shall develop 
morally to the level of the new requirements. 

In truth, the socialist himself, no matter how bitter his 
criticism of the present order, will hardly deny that his sys- 
tem would be impracticable and unendurable did it not folloAV 
after the present society, its accomplishment in science and 
invention, its organization of industry, its lessons of experi- 
ence. If, now, the State shall come to own the telegraph, the 
steamboat, the electric motor, the loom, the railroad, it is yet 
reasonably certain that under state control these things would 
never have come into existence. Socialism may prove an ex- 



302 OUTLINES OF ECONOMIC THEOEY 

cellent tiling after the period of advancement has passed, 
when the progressive energies of competition have spent 
themselves and the time of harvest has come, but it will 
remain true that under no other than a system of liberty and 
free contract could this progress have been possible. 

Upon the assumption of a general tendency in civilization 
toward development, socialism seems therefore possible only 
as a temporary condition. Otherwise than as temporary, it 
must stand in antagonism to the forward movement of the 
race. 

It is not, however, safely to be assumed that society will 
continue to progress along the line upon which progress has 
already taken place; or, indeed, that the next social epoch 
will be a distinctly progressive one. 



SOCIALISM 



When Louis Blanc and Mably rely upon the sentiment of honour 
instead of personal interest as the spur of production and the rein of con- 
sumption, and in respect to effectiveness instance the army code of honour, 
they forget, among other things, the thirty cases of capital punishment 
provided in the military code. . . . Were all burdens and pleasures of 
life equally distributed under strict communism, and distributed equally 
in line with the concepts of the masses, men like Thaer, Arkwright, and 
others, who now in library and laboratory produce food for hundreds of 
thousands, would produce with mattock and shovel at the highest enough 
for three or four men only. . . . General and equal popular education 
as the communists demand it would practically work out at this merely 
— that no one would attain to the higher scientific development. . . . 
' ' In place of the current competition to produce the most and the best 
possible there would come about under socialism a competition as to who 
could produce least and worst." (Bastiat.) . . . When the first Virginia 
settlers in 1611 abandoned the system of communistic labour and joint- 
stock methods, it came about immediately that in one day there was as 
much accomplished as before in a week, three labourers producing as 
much as thirty did before. Even in New England among strong mer. 
accustomed to labour, who had made so great sacrifices in the interest of 
their faith, communism was attended with continual famine ; this changed 
only in 1623, when private property was established. — Eoschek, trans- 
lated from System cler Volksioirtschaft, Book II., j^assim. 



POLITICAL ECONOMY AS AN ART 303 

As to the attitude of socialistic thought toward the more important 
sides of civilization, Roscher recalls the decree of September, 1793, by 
which the garden of the Tuileries was ordered changed to a potato field, and 
notes that later Hebert obtained a decree whereby under pain of death all 
parks were to be changed into potato fields. Babeuf declared all science 
and art to be evil ; no one ought to learn more than reading, writing, and 
ciphering, and a little geography of France. It is intelligible that Bismarck 
should have pronounced socialism "Ein von inappellablen Demagogen 
regiertes Zuchthaus." — Roscher, Book II. c. 81, 82. 

In truth, I regard it unfortunately as very conceivable that the future 
may bring us important tendencies toward the level of current German 
socialism, — not so much along democratic as along imperial lines through 
greatly increased taxation, police organization, and centralization, and 
especially through increased state activities. . . . Moreover, experience 
teaches that for the most part very poor and uncouth stages of social 
development practise in greater or less degree common ownership of 
property. — Roscher, Book II. c. 84. 



ECONOMIC ARGUMENT 

230. We are now ready to approach the different schemes 
for social remedy in their more purely economic aspects. It 
will, however, conduce to the saving of time still to apply 
ourselves more particularly to the examination of socialism. 

However antagonistic socialism and anarchism may be on 
their positive sides, they join issue in fierce attack upon the 
present social order. We shall find that in their affirmative 
aspects, in definite tangible recommendations, in the detail 
of their proposals, neither socialism nor anarchism has as yet 
much to offer. The normal development and adjustment of 
things is expected to provide a new scheme of organization 
after the old is once done away. 

There is, however, this much of definiteness in positive 
socialism: its new organization is expected to establish itself 
through a gradual extension and multiplication of the activi- 
ties of the State substantially as we now know it. No cata- 
clysm is wished or expected, no breach in orderly development 
and continuity. Your modern socialist is an evolutionist. 



30i OUTLINES OF ECONOMIC THEORY 

In an earlier aspect of tlie discussion, the question was raised, 
'but not answered, whether the developments of the last hun- 
dred years have worked to the advantage of the 

Has the nine- , , ' . , ^^ , t , • ,i ,^ 

teenth century labouring ciasses. it seenis clear that with the 
been weu for increased productive efficiency of labour, wages 
have largely increased and the level of com- 
fort has risen. That this gain is in no part offset by other 
tendencies, we need not claim. Whether the development of 
things has been fortunate or unfortunate, competition cannot 
justify itself by pointing to progress achieved under it, — if 
there has been any, — without showing that this progress has 
been due to the competitive system. Compulsory cooperation 
does not make out its case till it has shown itself better 
adapted to conditions as they will and must exist. 

Likewise wdieii the socialists assert that the outlook for the 
future is a dismal one, that the doctrines of the established 
political economy point to disaster, the truth of 
the assertion need not, for present purposes, be 
examined. The reply is by w^ay of a question — 'What of it? 
Will socialism serve better? If, as the necessary outcome of 
the tendencies toward reproduction, the world is definitely 
set toward over-population, nothing in particular follows. Is 
the danger less under the collectivist's scheme? There are 
restraints more or less effective in the competitive system; 
how does the other system compare? If the Eicardian doc- 
trine of rent compels the conclusion that over-population 
means hunger, the question remains whether under socialism 
over-population can mean something else. The competitive 
system is not responsible for these sociological and agricult- 
ural facts, nor is the economist who announces them charge- 
able wdth them. Our business is to compare competing systems 
in the light of economic laAvs. The competitive system is on 
trial in comparison wdth other systems and not as an ideal 
type of organization. 

For this purpose of comparison, then, it will be profitable 
to consider the objections urged against the present organiza- 
tion of society, and to inquire what remedy therefor is offered 



POLITICAL ECONOMY AS AN AKT 305 

by the socialistic scheme as against the solutions possible . 
under the existing system. 

These objections will be considered under the three heads 
of Production, Distribution, and Consumption. 



COMPETITIVE PRODUCTION CRITICISED 

(See Section 147) 

231. That there are considerable wastes in competition is 

not open to question. The stimulus of private interest works 

out in a vast amount of crime and disorder 

1 . T -1 j_ ■ T j_ • ■ The wastes of 

which necessitates, m policemen, courts, juries, competition. 

sheriffs, and lawyers, the expenditure of impor- 
tant social energies. Likewise, in purely private affairs the 
expense of preventive methods against ill-faith and dishonesty 
is a weighty matter. Outlays of this sort would be relatively 
small in the collectivist system. 

There are large wastes of energy in competitive attempts to 
give to cheapness the outside gloss of value. Shoddy in cloth, 
paper in-soles in shoes, clay in soap, marl in sugar, not only 
waste the energy of putting them in, but largely destroy the 
usefulness of the honest share of the product. Socially speak- 
ing, all this cheapness is excessively dear. 

There is a similar compound of waste with something Avorse 
than waste, in the enormous outlay for newspaper puffing and 
lying. The entire system, also, of marketing through agents 
and commercial travellers has in it large elements of waste. 
The excessive multiplication of middlemen, generally, falls 
under the same head. No doubt, however, some share of this 
outlay is socially productive. (See Section 101.) 

232. In many industries, also, competition does not make 
toward cheapness either apparent or real, but conduces directly 
and inevitably to wastes of energy. These are, for the most 
part, cases falling under the law of increasing returns, where, 
witli expanding production, the cost decreases per unit of out- 



306 OUTLINES OF ECONOMIC THEORY 

put. In these cases, combination of some sort is an ultimate 

certainty, unless made legally impossible. But commonly 

„ ^ , ^ , combination does not occur until large expendi- 

Wastes as related ° ^ 

to industries of tures have been made in unnecessary competing 
increasing investments. One city water plant, one gas 

plant, one tramway company, are all that are 
needed in most cities, and all that are possible if the minimiim 
of productive cost is to be attained. Parallel lines of railroad 
work in many cases not merely a loss of capital, but compel 
permanently high outlays for transportation and high trans- 
portation charges. It continually happens that several rail- 
roads divide the traffic which might equally readily, and much 
more economically, be handled by one. Socially speaking, 
there is no escape under the present system from these evils, 
otherwise than as in some degree combination may transform 
them into another sort of evil — which will be discussed under 
the head of Distribution. 

The carelessness of employers in matters of light, ventila- 
tion, and sanitation must also be regarded as productive 
losses, by reason of the permanent injuries which are entailed 
upon the productive powers of the labourers. Tor similar 
reasons, the mental, moral, and physical evils of child labour, 
and in some degrees of women's labour, must be considered 
under this head. 

The present system is also responsible for hordes of human 
beings living by their wits or their worthlessness — social 
make-nothings, paupers, vagabonds, speculators of useless 
types, prostitutes. 

233. Parallel with these are the respectable do-nothings, 
the leisure rich, the inheritors of wealth, the coupon-cutters. 
Within this class of respectable make-nothings must be reck- 
oned, also, the valets and waiting-maids, the out-riders, hos- 
tlers, servants, and flunkeys, whose energies never work out 
in any utility for which the world has any real need. (But 
see Sections 250, 251.) 

And in a background of misery stand the unemployed, with 
whom, as misery, we are not at present concerned, but only 



POLITICAL ECONOMY AS AN AKT 307 

as waste. Never an inconsiderable class, they swell in times 
of industrial depression to an enormous army. 



COMPETITIVE DISTRIBUTION CRITICISED 

234. Recalling that the subject of distribation concerns 
the forces which apportion the social dividend into wages, 
profits, rent, and interest, we have to inquire whether the 
competitive system works out to justice in this regard. What 
are its tendencies? 

The evils falling under this head are not largely in the line 
of waste. Such leaks of energy as are due to the multiplica- 
tion of middlemen, jobbers, wholesalers, agents, commercial 
travellers, and numberless retailers, fall, as we have seen, 
under the head of production. These men are not in theory 
distributors, but producers. But there are, clearly enough, 
too many of them. 

It was shown in Section 153 that little can be accomplished 
by wage-earners toward decreasing the share of the capitalists 
in production. Nor have we yet seen good reason in justice 
why this decrease should be attempted. In truth, there ap- 
pears to be no good reason to believe that, could this decrease 
be accomplished, any benefit would accrue to the wage-earner 
therefrom. (Section 127.) 

The objections to the landlord's share of the social product 
seem to be well founded, to the extent that this share is 
derived from the unearned increment element in land values. 
This subject will be discussed more fully i:i later pages. (Sec- 
tions 282, 283.) 

The wage-earner's quarrel is, however, mainly against the 
employer, the imprenditor, and concerns the distributive share 
called profits. 

Are iinprenditors' profits out of proportion to their services? 
(See Section 127.) 

Can wage-earners other than in individual cases greatly 
suffer from injustice at the employer's hands? 



308 OUTLINES OF ECONOMIC THEORY 

Does competition generally protect the wage-earner in this 
respect? (See Section 128.) 

Who profit mostly, imprenditors or consumers, from unjust 
treatment of wage -earners? (See Section 128.) 

Does any one, in the long run, profit from the different 
methods of scamping? (See Section 128.) 

235. Criticisms of the distributive system are better founded 
as applied to monopolies. We have seen that monopolies 
result from conditions in which competition involves large 
wastes. Where these wastes come to an end, the bad distri- 
bution of monopolies begins. 

The profits of speculators also fall within the topic of dis- 
tribution. What part of these are indefensible? (See Sec- 
tions 134-136.) 

In what degree are they attributable to a bad land system, 
or to stock operations within the industries which naturally 
tend toward monopoly? 

Are the profits of middlemen, merchants, wholesalers, etc., 
defensible in any degree? (See Section 101.) Are they over- 
large? 



COMPETITIVE CONSUMPTION CRITICISED 

236. Consumption is merely one phase of demand — the 
most important phase — and as such is at the very foundation 
of all economic reasonings. Political Economy, as an art, can 
hardly go deeply into its subject-matter, human welfare, with- 
out attempting to fix, so far as is possible, the relations of 
wealth consumption to human well-being. In a later chap- 
ter, something like a full examination of this topic will be 
attempted. Por present purposes, however, we shall merely 
note what seems, under this head, the most effective line of 
attack on the present social order ; namely, the entirely arti- 
ficial nature of much of its demand for wealth. Under a 
system of practical equality in the division of product, the 
present enormous outlays of energy devoted to the competition 



POLITICAL ECONOMY AS AN ART 309 

of display would find no place. How important a matter these 
are must be postponed for later examination. 

237. The great total of consumption in vicious, or waste- 
ful and health-injuring lines requires mention here. It is a 
serious question, however, whether with our 
present imperfect knowledge of physical and Sumptuary legis- 
mental hygiene, and with the impossibility, 
in the nature of the case, of our ever becoming certain that 
there is no more to know, it is desirable to attempt control 
over the individual in these respects, otherwise than as his 
action may bear in direct and considerable fashion upon the 
Avell-being of his fellows. It is well to keep in mind, how- 
ever, that any form of protection, if judged to be expedient, 
may as properly be extended over the interests of future gen- 
erations, as of contemporaries. On the other hand, it must 
be remembered that liberty as a developmental force by 
virtue of the responsibility which it imposes upon the indi- 
vidual, and as the first condition to the effective working out 
of the law of the survival of the fittest, has in itself a value 
to offset many an admitted evil. 



SOCIALISM AS A REMEDIAL SCHEME 

238. Before proceeding to a detailed examination of the 
various problems suggested in the preceding sections, it will 
be well to consider, in broad lines, the merits of socialism as 
a remedy for these evils. 

Would it enlarge the social dividend? Undoubtedly in 
some degree the protective duties of the State 
would be lightened by the disappearance in a the"dividendT^^ 
large measure of the temptations to evil associ- 
ated with private interests. On the other hand, the multipli- 
cation of purely administrative offices would be great. 

The wastes of adulteration and scamping would mostly be 
avoided, but trades-unionism and well-considered legislation 
should be sufficient to control these under the present system. 



SIO OUTLINES OF ECONOMIC THEORY 

The outlays for middlemen, agents, and advertising are not 
entirely wastes at present — perhaps not even mostly wastes. 
That goods could be sold at lower prices without them is not 
final, if they must be sold at less convenience in time or place. 
Centralized merchandising is not an unmixed advantage, as is 
proved by the fact that the small shop maintains its existence 
under the present system. Yet in large measure it is true 
that the competition of middlemen is a strife for customers 
rather than for lower prices. In the degree that the case is a 
serious one in this aspect, voluntary cooperative merchandis- 
ing, as at present applied, appears to offer a complete remedy. 

The wastes from the subdivision of industries which could 
better be centralized, and from the multiplication of lines of 
transportation, must be admitted. If, however, these evils 
could be avoided under state socialism, this fact would justify 
precisely this degree of socialism under the present system, 
but not the socialistic system entire. We shall see later that, 
even in these cases, state operation does not appear to be the 
only practicable remedy. 

The army of loafers, rich and poor, are not necessary prod- 
ucts of the competitive system, but are in large measure the 
result of a vicious system of landholding, of an extremely 
individualistic view of rights of inheritance, of a lax and 
unscientific administration of both public and private chari- 
ties. These questions will come up later for extended treat- 
ment. The leisure classes, also, have some important economic 
functions commonly disregarded. (See Sections 250, 251.) 

There remain for consideration the wastes of productive 

energy attending financial crises. Not only from the point of 

view of production alone, but as well from other 

Crises. . . 

points of view yet to be considered, we are con- 
strained to admit that if the commerical crisis is beyond 
remedy within the present system, there can be little danger 
of society finding itself worse off in any probable change. 
Indeed, it may be asserted that, in the view of the average 
wage-earner, if there were no commercial crisis with its 
uncertainties, its injustices, its hunger, its temptations and 



POLITICAL ECONOMY AS AN ART 311 



humiliations for men and women, there would be no social 
question. 

239. To resume, socialism, as a system of production, 
must be admitted to possess important advantages over the 
present system, so far as concerns natural 
monopolies and some of the immoralities of pro- 
duction. It could do something to limit the undesirable 
multiplication of middlemen. It would put an end to com- 
mercial crises. 

On the other hand, it would paralyze the motive powers of 
production by removing the stimulus of personal interest — ■ 
by destroying all relation between remuneration and product, 
between compensation and effort. 

Not so evident, but equally important, is the fact that under 
socialism, religion, art, poetry, literature, science, philosophy, 
and speculation would become state activities, or would perish; 
and as between disappearance and state control, there could be 
no great choice. These things are economic products — com- 
modities under the form of services. The socialistic conception 
of wealth is sheer materialism. (See Section 20.) 

Again, even restricting the notion of wealth to material 
products, it must be called to mind that the industrial effec- 
tiveness of labour is largely dependent upon the aid of science. 
If socialism in its economy of energies is of doubtful advan- 
tage at present, it would with passing time become increas- 
ingly bad. 

Socialism would introduce an era of individual irresponsi- 
bility, and of state tyranny in matters of thought and faith. 
It would result in intellectual and moral lethargy — a vegetable 
humanity. ^ 

As a scheme for distribution, socialism would do away with 
the imprenditor — the captain of industry — the brain centre 
of enterprise. This can hardly be proposed in the interests 
of maximum production. The employer holds his place by 
virtue of his service to the wage-earner. (See Section 127.) 

It may, however, be true that society could well forego some 
measure of product in aid of a better distribution of product. 



312 OUTLINES OF ECONOMIC THEORY 

Under the head of Consumption, Ave shall find some ground 
for assenting to this proposition in the abstract. Still it is 
not clear that the present system allows to the imprenditor 
rewards out of proportion to his services, or that the tendency 
of profits is such as to justify uneasiness. (Section 127.) In- 
come taxation deserves examination in this regard. To the 
extent that employers are able by injustice or oppression to 
profit at the expense of wage-earners, the development of 
trades-unionism ought, in different ways, — later to be exam- 
ined, — to offer a remedy. At all events, the sufferings of 
wage-earners under free contract are probably not greater 
than would be those under officialism with its possibilities 
in oppression and favouritism. 

As concerns consumption, socialism seems to offer a sufficient 
remedj^ for the wastes of product which go with the competi- 
tions of display. These evils are far-reaching, even appalling, 
and it is not clear that the present social order has in it any 
remedy. (See Sections 259-274.) 

In the lack of speculative adjustments of supply to social 
requirements, socialism is at some disadvantage. A system 
of exchange of day's labour for day's labour would not serve 
for this case. Yet some practicable modification could proba- 
bly be found with regard to cereal products, and, if neces- 
sary, the State might hold even the supply of an entire year 
in reserve. 

240. Early failures of socialism do not of necessity argue 

its ultimate impracticability, but merely that success is not 

possible on crudely experimental lines. There 

Confusion in ^^ science in socialism if there is an art. 

terminology. 

Nor, indeed, have all the efforts toward social 
amelioration called socialistic, rightly borne the name. The 
brave band of philanthropists who, under the lead of Kingsley 
and Maurice in England, devoted themselves forty years ago to 
the spread of self-help, cooperation, and labourer's initiative, 
called themselves socialists. They were individualists in 
methods — advocates of voluntary association. So at present 
there is a body of earnest, high-purposed effort, which insists 



POLITICAL ECONOMY AS AN ART 313 

on confusing terminologies by calling itself Cliristian-social- 
istic. Socialism is something else. 

241. There are defects enough in our present social order 
— grounds for discontent and dissatisfaction — evils which 
the socialists believe their plan to avoid. Nev- profits are sub- 
ertheless the central fact in the competitive ject of coEtro- 
system, the free struggle for competitive profits, ^^''^y- 

is the central point in the socialistic attack upon it. The 
wage-earner asserts that he fails of obtaining his fair share 
of the social dividend. He does not receive as much as he 
produces. Lay aside the question of waste, lay aside the 
query whether socialism would better apply the social ener- 
gies, the present system is denounced as unjust in not properly 
apportioning rewards to services, in somehow tricking the 
labourer — exploiting him, as he puts it — for the gain of 
some one else. 

Observe, however, that the attack is not greatly upon the 
rent share of the product. Eents are inevitable, though pos- 
sibly the State should appropriate a larger share of them. (See 
Sections 282, 283.) This, however, is possible by taxation or 
by some method outside socialism. Xor is the contest largely 
upon the question of interest. Interest also is unavoidable. 
As long as wealth aids in production, its use will be attended 
with the right to compensation. Interest is remunerative of 
real services. 

242. The socialistic quarrel is with the employer — the 
imprenditor — upon the justifiability of profits. The question 
remains, then, whether these are too large. Is the profit sys- 
tem just? Are profits received at the expense of employes? 
Do profits correspond to services rendered? 

On the side of the socialist, it is urged that labour alone 
is creative of wealth. Capital itself commands 
remuneration only in its character of stored-uvj ^^ labour alone 

•J _ J- productive ? 

labour. If all product is the result of labour, 

the remuneration should absorb it all. There is no room for 

profit. 

This is true enough, but true only when the term " labour " is 



314: OUTLINES OF ECONOMIC THEORY 

made sufficiently inclusive and is rightly understood. There 
are different sorts of labour. jSTo man has raised more corn 
than the chemist, or woven more cloth than the inventor. 
The employer is a labourer as well as is the operator at the 
loom. Under socialism, there must be overseers, planners, 
managers, directors, captains. In war, the generals as Avell 
as the privates are soldiers. The victories are due to both. 

Wage-earners enlist Avith the imprenditor, because of his 
ability to procure from them larger services, and to provide 
for them a larger recompense than they could obtain under 
their own management. (Section 127.) 

Profits, when large, fall to the employer by the common- 
place fact that peculiarly large ability brings peculiarly large 
returns, the amount of the profit being chiefly determined by 
the degree in which any imprenditor is able to reduce his 
expenses of production below those of the marginal employer. 
(Section 127.) Even the marginal employer is able to pay 
labourers at above their productive ability when working for 
themselves. Labourers receive, by reason of the competition 
of their employers, approximately the amount by which they 
add to product. 

Any system of economy which attempts to dispense with high 
managerial ability will suffer correspondingly in social divi- 
dend. Wherever labourers can succeed without an employer, 
the system of cooperative production stands open to them. 
(Section 127.) 

The evils associated with the relation of employer and 
employe are numerous enough and serious enough. So far 
Is socialism ^^ these evils consist in injustice by the 

necessary as a employer toward individual employes, trades- 
reme y. unionism should suffice for a remedy. Trade- 

unions and the law together should suffice to prevent adultera- 
tion and scamping. (Section 153.) Monopoly, so far as it is 
socially injurious, rests largely upon cut-throat competition. 
The remedy is a problem well within the machinery of legisla- 
tures and courts. The compensations for risk are justified by 
the very fact of the risk. Speculative profits flow from social 



POLITICAL ECONOMY AS AN ART 315 

service, though intermixed with gains from dishonest methods. 
Land speculation should meet through taxation all necessary- 
discouragement. 

The discussion has probably proceeded far enough to indi- 
cate that, in the view of the writer, the social question is not 
strictly one question, but rather a congeries of questions. ISTo 
one thing is the matter with society, and no one device will 
suffice for a remedy. In this attitude will be approached the 
various methods of social amelioration. 



COOPERATION AND PROFIT-SHARING 

243. Much that has been said of socialism will apply to 
cooperation, so far as cooperation is a method of distribution 
of the social dividend. The terms "coopera- 
tion " and " cooperative distribution " are liable 
to misconception. Cooperative production and cooperative 
merchandising must be accurately discriminated. That coop- 
eration is a vast success in England and Scotland is certain, 
but cooperation mostly confined to merchandising. 

There are imdoubtedly great wastes in the system of mid- 
dlemen, in extensive advertising, including in large part the 
rent of palatial locations, in the dear cheap- 
nesses of gloss and shoddy, and in bad debts, cooperation^ ° 
The cooperative societies of England and Scot- 
land embrace a membership of nearly a million and a half, 
representing a consuming population of probably five millions 
of people. These societies have succeeded in cancelling the 
wastes above mentioned. The local societies, mostly doing 
business on a cash basis, are relieved of the necessity of 
advertising and of losses from bad accounts. Goods of hon- 
est quality only are bought and sold. These local societies 
are banded together cooperatively, in great central wholesale 
houses, conducted similarly to the retail societies. Both 



316 OUTLINES OF ECONOMIC THEORY 

wholesale and retail societies sell at ordinary market prices 
in competition with ordinary dealers, and distribute the 
profits annually to members in proportion to the purchases 
made. The system operates primarily as a reduction in 
prices, and secondarily as an automatic savings institution. 
Its success has been enormous and progressive. Cooperative 
merchandising is no longer an experiment. 

244. Distribution, as an economic term, means something 
altogether different. It points to the method of distributing 

the dividend and not of expending the quotient, 
distribution? "^^^^ problems of distribution refer to the forces 
and tendencies manifest in the apportionment 
of wages, profits, rent, and interest. Cooperation, as it bears 
upon production, meets difficulties similar to those examined 
under socialism. How dispense with the manager? How 
substitute for his far-sighted authoritative direction the 
collective, many-minded stupidity and inexperience of the 
workingmen? This problem may be solved sometime with 
increasing ability among the masses. Sometime also posi- 
tions as industrial managers may afford oiDenings as a half- 
philanthropic profession to those among the rich who seek 
a life of usefulness. Thus far cooperative production has 
registered few successes. 

Clearly enough, it offers advantages in enlisting the earnest, 
watchful interest of the labourer, and in the economy of mate- 
rial and machinery which it fosters. In some 
^roduction^ industries it may prove practicable ; but even at 

its best, it is unlikely to occupy more than a sub- 
ordinate position in any condition of society. Social students 
may wish well to the institution, in view of the fact that, with 
its spread, many of the fallacies current among workingmen, 
both in politics and industry, will tend to disappear with 
repeated illustration that wages flow from product. In fact, 
cooperation is in many ways educational. 

245. In one other respect, also, cooperative distribution 
has great value as supplementary to competitive distribu- 
tion. In ultimate analysis, demand and supply are merely 



POLITICAL ECONOMY AS AN ART 317 

different aspects of supply, different products seeking exchange 
with each other. Cooperation is well adapted in times of dis- 
tress to preserving demand and supply in con- 
dition of effective adiustment for purposes of Amelioration of 

'' I ^ . panics, 

exchange. The poverty of hard times is the 

equivalent of low production following upon the out-of -joint 
condition of exchanges. Division of labour is only in part 
effective, and the substitute system of barter establishes 
itself slowly and inadequately. This condition of faulty ad- 
justment finds its cause in currency disturbances. Clearly 
if cooperation were general, money might be dispensed with, 
as in socialism. With a widely extended system of coop- 
eration also, cooperators might, without great discomfort, 
forego, during the period of emergency, the use of circu- 
lating media. 

In this connection there opens up a promising field of use- 
fulness for trades-unions. A system of emergency workshops 
between which exchanges should take place by the crude ap- 
pliances of barter, the terms of exchange being determined 
by the price levels of the general market, would go far to 
mitigate the sufferings from lockouts and strikes, and would 
largely disarm the famished competition of the out-of-works. 
The Salvation Army at present makes partial application of 
this principle. 



PROFIT-SHARING 



246. Accepting the principle that wages flow from product, 
it follows that in proportion as competition among employers 
is effective, wages tend to increase with advanc- competition 
ing product. Competition is, in fact, a sort of tends to protect 
automatic profit-sharer. Labourers, however, ^^&^-^^^^^^^- 
rarely appreciate this; and in truth competition seldom acts 
swiftly or perfectly enough to make it completely true. To 
the extent that it is true, employers can have no reasonable 
objection to profit-sharing. To the extent that it fails of 



318 OUTLINES OF ECONOMIC THEORY 

truth, profit-sharing is due to labourers as a mere matter of 
justice, on condition, liowever, that they Avill live up to it, 
that is, will accept a necessary fall in wages cheerfully and 
loyally, allowing some part of their accrued profits from 
prosperous times to stand as a guaranty fund for their fidel- 
ity in less favourable weather. Wages, as they rise slowly, 
fall slowly. It will later be considered whether some of the 
most serious aspects of commercial crises do not find their 
explanation in this fact. 

247. Profit-sharing is thus at best a system of wages-sup- 
plement, intended to conform, as nearly as practicable, to 
conditions as they would exist under perfect 
device ^"^^^^°^ competition. Profit-sharing rests, as matter 
of theory, upon the just and normal tendency of 
wages to correspond to profits. (Section 65.) It follows, then, 
that if there is in profit-sharing of itself some tendency 
toward an increase of product, wages may advance consist- 
ently with the advancing profits of employers. In fact, the 
motive of employers in proposing profit-sharing is rarely one 
of philanthropy or love of justice, but merely an offer of some- 
what enlarged wages in consideration of considerably enlarged 
product — a mere device in wage-paying. This is possible 
through the heightened energy and care and economy of the 
employes resulting from their clearer view of the fact that, as 
producers, their interests are parallel with the interests of 
their employers. In fact, many economic complications will 
come untangled with the better appreciation of this principle. 

In the light of the foregoing discussion, the advantages 
and disadvantages of the ownership by employes of stock 
in incorporated industries will readily be estimated. 



NOTES 

The difference between the product of interested labour and that of 
labour which is careless and lazy is always noticeable ; but in a whale 
fishery it is exceptionally great. An eager search, a zealous pursuit, and 
a resolute attack are secured only by the stimulus of a person.al interest 



POLITICAL ECONOMY AS AN AET 319 

in the result. Superintendence by owners is impossible, unless the cap- 
tain be a proprietor ; and, if he is so,, the plan becomes to that extent 
cooperative. Even though the captain were the sole owner, his best 
efforts would not insure a profitable voyage, unless a heartier obedience 
could be secured than is usually seen on ships. Moreover, payment by 
the day might interest the crew in unduly prolonging the voyage. Profit- 
sharing has, therefore, driven the wage system from this industry. 

— Clark, Phil, of Wealth, p. 184. 



STATE AND MUNICIPAL OWNERSHIP 

248. The measure in which it may prove desirable for 
society as a whole to operate industries under government 
monopoly, depends largely on how far these 
industries tend to become private monopolies N^*""^^! ™oiiop°- 
otherwise. Wherever competition is attended 

with considerable wastes, combination tends to establish itself. 
With railroads, for example, multiplication of lines and divi- 
sion of traffic make for increased cost of service, whatever 
may be the effect on the charge at which these services are 
rendered. The tendency, therefore, toward combination is a 
strong one. 

Over and above these wastes, private ownership of trans- 
portation interests is accompanied by the familiar evils of 
traffic discrimination and by the infinite ingenuity of dis- 
honesty for personal gain. 

249. Governmental intervention of some sort in transporta- 
tion industries is unavoidable, not in granting corporate exist- 
ence, — for this is merely the recognition of intervention of 

a partnership, — but in the delegation of the some sort 
power of eminent domain, without which pro- °^'^^^^^'t^- 
jected railroad improvements would go to wreck upon the 
greed of private ownership. Intervention seems indispensable 
likewise for the control of dishonesty and the prevention of 
discrimination. Whether something more radical than in- 
tervention should be undertaken, is more questionable — as 
a matter, however, of expediency or necessity, and not as a 



320 OUTLINES OF ECONOMIC THEORY 

question of abstract principle. Comparing state ownership in 
the continental states of Europe with private ownership in 
England and America, either in cost of service or in efficiency 
of service, experience thus far argues strongly in favour of 
private ownership. Such improvements, indeed, as have been 
made under a state ownership have been mostly borrowed from 
railroads managed under individual ownership. Not only 
this, but as long as private ownership in land, with its attend- 
ant speculation, continues, state OAvnership of transportation 
indiTstries must lead to infinite demoralization in politics. 
On the other hand, there are in the present system great dan- 
gers in something the same direction by lobby and bribery. 

If possible, the advantages of private enterprise should be 

preserved in combination with the helpful tendencies of state 

control. Rigorous supervision, together with 

Practical progressive taxation on profits and dividends, 

intervention. r o i 7 

should be sufficient for this case. The French 
people have proceeded upon the plan of granting franchises 
for long terms of years with a reversion to the State of the 
franchises and property at the end of the term. Possibly state 
ownership of roadbeds would be advantageous, the property 
being leased by competitive bids for operation by private 
corporations. 

With regard to natural monopolies in municipal affairs, as, 
for example, tramways, gas, electric light, and water com- 
panies, the choice seems to lie between municipal operation 
pure and simple, progressive taxation on profits, and competi- 
tive leasing. It is certainly indefensible that these valuable 
franchises should be transferred without compensation and in 
perpetuity to private interests. 



THE SOCIAL FUNCTION OF THE RICH 

250. Eiches are largely relative. The desire for inequality 
is an important force among the motives of wealth production. 
Were all equally rich or equally poor, both the joy of wealth 



POLITICAL ECONOMY AS AN ART 321 

and the sting of poverty would niostl}' disappear from life. 

Mere leadership and the possession of power are things which 

human nature prizes. No inconsiderable share 

of our wealth owes its attractiveness to the fact ^^!'^^.^ p^'"'' 

relative. 

that others admire us or envy us. The man- 
sion on the hill is desirable, not so much for the view 
which it commands of the squalid huts below, as for the view 
which the squalid indwellers'have of the mansion on the hill. 

These uses of wealth outside the range of ordinary consump- 
tion have already been referred to, and are at the foundation 
of some of the most perplexing problems of social life. Yet 
no small part of the charm of rural scenery and of the beauty 
which makes city life endurable has its origin in mere osten- 
tation. The rich are not able even in tliis respect entirely to 
monopolize their wealth. 

In truth, no man can in his own right and for his own bene- 
fit consume a very considerable portion of riches. This is par- 
tial consolation socially for those cases in which large fortunes 
fall to their possessors otherwise than as the reward for pro- 
ductive activity. The profits of land speculation, in almost 
their entirety, and in considerable degree the profits of other 
speculation, correspond to no social service. But the in- 
ventors, the manufacturers, the projectors and organizers of 
the great industries, the new methods and the new systems, 
hold their fortunes by good title of services rendered. 

The consuming capacity of the individual is in many direc- 
tions strictly limited. The rich can eat no more abundantly 
than the comfortably poor. Opportunities for 
pure waste are mostly confined to expenditures ^™^^^®. °^ ^°^' 
for servants, attendants, and flunkies. Rich 
men are commonly busy men of simple tastes. Extravagance 
is due to other members of the family. But whether directly 
or by the aid of the family, it is impossible for the very rich 
to consume their wealth. They must place it at the service 
of society as the condition of its preservation and of its divi- 
dend-paying capacity. Vanderbilt's steamships and railroads 
are not used or consumed by him, but by society. Factories 



322 OUTLINES OF ECONOMIC THEORY 

ultimately profit consumers rather than proprietors. Waste 
by the rich is doubtless an evil, but as mere waste a no very 
considerable evil. Distributed per capita among the wage- 
earners or the poor it would count for little. 

251. The evils of great fortunes are rather political or 

social than economic. This is strikingly shown in Mr. Charles 

Booth's lately published work on the people of 

J^l 1!°°^„T„ London. It is reassuring to note that out of the 
non-economic. ° 

five million people in the rich city of London 
only sixty thousand all told, men, women, and children, enjoy 
the luxury of an establishment with as many as four servants. 
" With less than half of these is the number of servants greater 
than that of those they serve." 

There are, however, some important and helpful social 
functions performed by the rich which are in danger of 
escaping attention. The first and the most 
Benefits. obvious service is that of aiding in the accumu- 

lation and capitalization of wealth. It is also 
to be noted that the reserve force for meeting commercial 
depression and famine is in a large measure afforded by the 
savings of the rich and by the possible reduction in their 
superfluous consumption. The second helpful function 
is, perhaps, the more important. It is certainly the less 
obvious. 

The case is stated admirably in the following quotation 
from Sidgwick: — 

There are, in fact, several distinct practical questions suggested by 
the connexion which history shews between the developmient of culture 
and the existence of a rich and leisured class in a community of human 
beings. We may (1) balance the additional happiness gained to the lives 
of the few rich by culture, against the additional happiness that might be 
enjoyed by the poor if wealth were more equally distributed ; or (2) we 
may consider how far whatever happiness is derived from culture by the 
many poor depends at any given time on the maintenance of a higher 
kind of culture among the few rich ; or (3) we may endeavour to fore- 
cast the prospective addition to happiness when culture shall have become 
more diffused, which would be endangered by any injury to its present 
development among the limited class who now have any considerable 



POLITICAL ECONOMY AS AN ART 323 

share in it. From each of these distinct points of view, arguments of a 
certain force may be drawn in favour of the present inequality in dis- 
tribution of wealth. 

I refer to what may be comprehensively though vaguely designated 
as the function of maintaining and developing knowledge and culture. 
I distinguish knowledge from culture, though the latter notion would 
naturally include the former, because of the peculiar economic impor- 
tance of the progress of science, as the source of inventions that increase 
the efficiency of labour. This progress in past ages has been largely due 
to the unremunerated intellectual activity, assisted by liberal expendi- 
ture, of rich and leisured persons. At the same time it is of course con- 
ceivable that the development of knowledge should be adequately carried 
on — as it is chiefly in Germany at the present time — by persons salaried 
and provided with instruments at the public expense. And the con- 
nexion between scientific discoveries and technical inventions is now so 
firmly established in the popular mind, that probably even a government 
controlled by persons of small incomes would not refuse the funds requi- 
site for the support of the study of physical science in universities, 
academies, etc. The case is different with such knowledge as has no 
obvious, practical utility, and is therefore only likely to be valued by 
persons susceptible to the gratifications of disinterested curiosity. Such 
knowledge must be ranked, as a source of elevated and refined gratifica- 
tion, along with literature, art, intellectual conversation, and the con- 
templation of natural beauty. The capacities for deriving enjoyment 
from these sources constitute what we call culture ; they are generally 
regarded by persons possessed of them as supplying a most important 
element in the happiness of life ; while at the same time, so far as we 
can judge from past experience, it is only in a society of comparatively 
rich and leisured persons that these capacities — and, still more, the facul- 
ties of producing excellent works in literature and art — are likely to be 
developed and transmitted in any high degree. 

There seems, therefore, to be a serious danger that a thoroughgoing 
equalization of wealth, among the members of a modern civilized com- 
munity, would have a tendency to check the growth of culture in the 
community. The amount of loss to human happiness that is to be 
apprehended from this effect is difficult to estimate ; especially since 
those who estimate it most highly would probably refuse to allow the 
question to be decided by a mere consideration of the actual amount of 
happiness that culture has hitherto given. They have a conviction for 
which they could not give an empirical justification that a diffusion of 
culture may be expected in the future which has no parallel in the past ; 
and that any social changes which cripple its development, however 
beneficent they may be in other respects, may involve a loss to humanity 



S-2i OUTLINES OF ECONOMIC THEORY 

in the aggregate which, if we look sufficiently far forward, seems quite 
immeasurable in extent. — Principles, p. 524. 

Note in passing that by so much as weight is given to this 
argument is socialism condemned. There is, however, another 
aspect of the case which deserves examination. (See Sections 
264-274.) 



POPULATION 



252. The law of decreasing returns as related to popula- 
tion indicates merely that the time has already come or will 

one day come when the food supply of the world 

Decreasing must be obtained with increasing difficulty, 

returns. . ° . "^ 

Progressive development in the art and science 

of agriculture may for a long time counteract this tendency, 
but seemingly cannot in the outcome overbalance it. It is 
indeed possible that chemistry may sometime solve the prob- 
lem of food production without recourse to agricultural 
methods. The secret once learned, the nitrogen in the air of 
the back yard and the ton of coal in the bin may furnish food 
for an ordinary family for a year. But assuming the necessity 
of a constant increase in the proportion of human energies 
applied to the production of food and of raw materials, it does 
not therefore follow that the lot of the race must grow increas- 
ingly harsh. The law of increasing returns is valid so far as it 
rests upon the possibilities of human development in the pro- 
duction of wealth. This tendency toward increasing returns 
may more than offset tendencies characteristic of land as a 
productive agent toward decrease. Indeed, this seems certain 
in the non-agricultural industries and possible even in the 
agricultural. 

At all events, it would be a gross error to suppose that to 
double the population would halve the average distributive 
share in the social dividend. Why? (Section 92.) 

253. The tendency with advancing civilization toward a 
lower rate of reproduction has already been remarked. (Sec- 



POLITICAL ECONOMY AS AN AET 325 

tions 96, 97.) In view of this fact and of the evidence thereof 
furnished in the statistical tables already examined, the dic- 
tum of an English publicist that the future 
dominion of the world will rest with three races ^°^^^ 
— the English, the Russian, and the Chinese, 
— is intelligible. With Russia's yearly increase of a million 
and a half in numbers, with the spread of its populations over 
Russian Asia, and with its warlike imperial traditions, one 
understands the nightmare of dread which rests over western 
Europe. When Russia has perfected its Siberian 
railway system and has established its back-door 
basis of supplies in the civilization and workshops of America, 
its populations may again stir themselves to roll westward as 
once before two thousand years ago. A German said to me a 
few years since, " Germany has no longer any fear of France ; 
we tremble for what may come from the east." 

254. The contest of civilization against the hordes of Asia 
Avill hardly be one of arms, but a struggle for survival in the 
business of living. When western gunboats 

Asia 

have foolishly broken down the barriers of 
exclusion about the Chinese, and have forced upon Asia the 
arts and sciences of western civilization, the Caucasian will 
find himself engaged in industrial death-grapple with a people 
of marvellous industrial efficiency, of swarming reproductive 
fertility, and of ability through centuries of poverty to thrive 
upon the minimum requirements of existence. The west has 
small interest to disturb the Asiatic hive. When the Chinese 
begin to pour out over the world, there will remain to the 
western races but one resource, that of crossing with the 
Chinese if they will consent to cross. On other terms west- 
ern civilization may endure, but the western races hardly will. 
Viewed in this aspect, the value to the world of English civili- 
zation and of the colonizing and reproductive energies of the 
English-speaking people can hardly be exaggerated. From 
their little island in the North Sea twenty millions of people 
have in a hundred years subdued to English institutions two 
continents almost entire, and a large portion of two more, 



326 OUTLINES OF ECONOMIC THEORY 

while English stations and smaller English colonies are scat- 
tered over all the seas. The English language is now spoken 
as mother tongue by one hundred and twenty millions of 
people, and is the alternate language of three hundred mil- 
lions more. 

255. Some perplexing questions present themselves as to 
the relations of birth-rates and standards of comfort to race 
progress — questions which must for the most part await a 
wider knowledge for their answer. 

Even with such modifications to the law of decreasing re- 
turns as have already been proposed, there are ominous sug- 
standardof gcstions in the tendencies of rent and popula- 

living and birth- tion. Maltlius, a hundred years ago, sounded the 
^^^^' warning that over-population and poverty are 

fast linked together. We have seen some reason to question 
the universal validity of the Malthusian forecast. There are 
certainly some conditions in some types of civilization in 
which the tendency toward increase of numbers is not manifest. 
However, it seems clear enough that taking humanity as a 
whole, with the strong reproductive tendencies of the lower 
races, the Malthusian prophecy is essentially a correct one. 

Adopting in substance these conclusions, Herbert Spencer 

has constructed thereupon an argument of altogether un-Mal- 

thusian hopefulness. Let it be admitted that 
Herbert Spencer. . . 

the race is unavoidably set toward poverty; 

it is precisely u.pon this condition and upon this condition 
only that its highest development is possible. According to 
this reasoning humanity will profit by the struggle for exist- 
ence as have all other forms of life. The argument, in fact, 
goes farther. In modern society success in the struggle for 
existence mostly turns upon moral and intellectual qualities, 
rather than upon physical strength or physical endurance. 
Natural selection will tend to the elevation of the race average, 
through the constant elimination by death of those specimens 
of the race least adapted morally and intellectually to the 
strenuous conditions of the struggle. The necessarily increas- 
ing drain of nervous energy must moderate the strength of the 



POLITICAL ECONOJMY AS AN ART 327 

reproductive instinct, and will cooperate with hunger and 
disease in weeding out the over-productive and the improvi- 
dent specimens of the race. The strongest forces for human 
improvement must therefore await the race discipline of 
poverty. 

256. This is a skilful flank movement. If poverty is in 
truth inevitable, this new theory interprets it reassuringly. 
Moreover, as we have already seen, the evidence from lower 
forms of life lends strong support to the Spencerian interpre- 
tation. 

There are, however, some characteristics peculiar to the hu- 
man family which fit awkwardly into this doctrine. Koscher 
remarks, "The greater number and the longer 
continuance of his wants, are amongst the most 
striking differences between man and the brute. While 
the lower animals have no wants but necessities, and while 
their aggregate watits, even in the longest series of genera- 
tions, admit of no qualitative increase, the circle of man's 
wants is susceptible of indefinite extension. And, indeed, 
every advance in culture made by man finds expression in an 
increase in the number and in the keenness of his rational 
wants." 

The accuracy of this observation is unquestionable. All 
forms of vegetable life and the non-human orders of animal 
life increase in number to the limits of subsistence. The 
limit of requirement does not change. Man develops new 
needs, new tastes, new desires, as well as a new intensity in 
each. That in any case higher standards of requirement have 
established themselves is proof that humanity has not in this 
case reproduced to the utmost possible limit. It costs care 
and money to raise children. Increased production of wealth 
may therefore expend itself in more rapid multiplication, or 
in service to higher pe?* capita requirements. But the two 
lines of expenditure are distinct and antagonistic. Rising 
standards of life discourage procreation. 

Not only this, but lower standards appear as clearly to 
encourage procreation. ISTor are analogies for this case want- 



328 OUTLINES OF ECONOMIC THEORY 

ing among the lower forms of life. It is the knurly apple that 
has the most seeds, the lower orders of animal life which 
reproduce in swarms. With the higher orders the period of 
gestation is longer, the number brought forth at a birth is less. 
So with humanity, low standards of living mean hopelessness, 
carelessness, ignorance, and improvidence. The highest birth- 
rate is commonly found among criminals and paupers. 

It seems inevitable that with those plants of which only 
one seed in a thousand comes to maturity, there should be 
an abundant production of seed, or that where of the young 
fish not one in a hundred escapes its enemies, the hatch 
should be a large one. This high birth-rate is the neces- 
sary condition to race survival, a necessary correlative of a 
high death-rate. Outside the human races, also, a high 
birth-rate involves a high death-rate, as does a high death- 
rate a high birth-rate. With an inelastic standard of life, 
increase in numbers cancels any advantage from easier con- 
ditions of existence. 

257. But with an elastic standard of living, an entirely 
new problem is presented. Plentiful food no longer means, of 
necessity, a more rapid rate of multiplication, but, possibly 
enough, better houses and food, or better clothing, or more 
recreation, or more competitive show. A lower birth-rate, 
reaching even to absolute loss in numbers, may result. 

If, on the other hand, diminished means of subsistence 
mean not so much a higher death-rate as a higher birth-rate 
with a falling standard of life, increased population making 
for poverty, and greater poverty for more rapid increase of 
population, until the minimum requirements of existence 
characteristic of brute life are reached, there is no great hope 
for humanity through the discipline of poverty. 

In truth, there is small basis for expecting poverty or dis- 
ease or crime to cancel itself by excess of death-rate over birth- 
rate. 

Again, fortunately or otherwise, human sympathies intro- 
duce into the problem a new element. Men would be other 
than they are, were they wanting in this characteristic of sym- 



POLITICAL ECONOMY AS AN ART 329 

pathy. The criminal, the pauper, and tlie invalid will not be 
allowed to perish even were there likelihood of their disappear- 
ance in the absence of aid. But it is better to attempt to cure 
ia the conviction that multiplication will take place anyway, 
than to abandon disease and vice in the hope that they will 
perish without offspring. Questions of methods are, however, 
matters of much greater difficulty. 

258. Our discussion has been carried far enough to indi- 
cate the perplexities of the question. The author has small 
light to throw on the problems he has suggested. The follow- 
ing propositions, however, are hazarded, with no very strong 
confidence in their helpfulness or tenability. 

Hope of race improvement, by the weeding out of material 
at the lower margin, as well as apprehension of deterioration 
from the relative infertility of the upper classes, 
are both without sufficient basis. So long as adjustment 
society does not crystallize into hard lines of 
caste and class, intermarriages may be depended upon to pre- 
serve any nation substantially homogeneous. To those who 
have sufficiently considered the bearing of the suggestive 
questions and arithmetical problems following Chapter VIII., 
it will be clear that in view of the essentially similar forces 
of heredity uniting in each one of us, there is small room for 
pronounced or important dissimilarities in nature or capacity, 
other than such as two or three generations can create or can- 
cel. We are all of us more truly children of the race than 
children of our immediate parents. In conditions of life as 
complex as are those of the present, with fitness for survival 
a matter of so many and varied aspects, and in combinations 
so numerous, the law of the survival of the fittest can have no 
great share in the tendencies of race development. If the 
race shall -ever become better adapted to the requirements of 
a higher life, it will be for the most part by that process 
known in biology as adjustment of structure to function — the 
progressive effects of use toward growth, and of disuse toward 
decay — the law which is broadly stated for everyday life in 
the expression, "practice makes perfect." 



330 OUTLINES OF ECONOMIC THEORY 



^ 



FASHION 

259. We have just discussed the standard of living in its 
relation to birth and death rates. But the topic is a far wider 
one than this. In another aspect it is the whole subject of the 
consumption of wealth. Economics is, on one side, the study 
of wants manifested as demand, and working out through 
production into supply of commodities. On the other side, 
it is an examination of the different applications of wealth to 
human requirements and of the relation of these applications 
to the wealth-producing efficiency and the general well-being 
of men. 

The task before us is one of no small difficulty. All the 
machinery and all the processes of economic life trace their 
energies back to this fact of consumption. All the purposes 
of production look forward to this fact as their goal. Man 
is the centre. The economic cycle begins in desire and ends 
in satisfaction. Having, therefore, examined consumption 
in its aspect of demand as economic energy, we have now to 
examine it more especially in its aspect as motive. We are 
set to investigate the ultimate values of wealth to men. 

260. Evidently the subject goes wider than mere eco- 
nomics. As all sciences are one in service to the conduct of 

life, it necessarily follows that all problems of 
Subject wider ■, ,. p t £ ■ -\ u. 

than economics, l^^man life appeal for aid to many sciences. 

The consumption of wealth is inextricably in- 
terwoven with the most perplexing questions of living. It 
includes, indeed, the whole science of living and dying. It is 
therefore intelligible that political economy has no light of 
its own with which to walk this labyrinth. Appeal must be 
made to physiology and biology, as well as to ethics and re- 
ligion, for aid in the solution of these prob- 
question^ Icms. What, for example, is the test, or 

what are the tests, of right living ? In what 
aspects is life worth living, and why and when? What things 
in human nature are best to be fed and what best starved? 
Is this merely a question of individual well-being, or has 



POLITICAL ECONOMY AS AN ART 331 

the neighbour a part in the estimate? How many neigh- 
bours? what neighbours? Does the inquiry cover one life, or 
more? Are unborn generations our neighbours for this pur- 
pose? And what, indeed, is another's good to me? Why 
should any man be sympathetic — brother-loving? Are sym- 
pathies and tendencies matters of choice and motive, or are 
they fixed human attributes, parts of our organization, as far 
beyond our power to create or cancel as are our appetites or 
tastes, or our bodily constitution? Are these things mere 
characteristics, as weight belongs to matter or impenetrability 
to stones? 

At any rate, selfishness, self -care, self-respect, self-reverence, 
have their place also. Where is the line of adjustment — the 
boundary of reconciliation between one's well-being and one's 
duty or interest in regard to his neighbour? How harmonize 
egoism and altruism? These problems are all hidden in the 
science of wealth consumption. Political economy alone will 
not furnish the solutions. 

261. Let it be temporarily assumed that the ultimate 
ethical test is in the conformity of all activity to what Ward 
lias termed ''the organization of happiness." This seems a 
safe enough test, since if happiness is not the ultimate fact in 
human well-being, yet somehow highest happiness must flow 
from highest well-being. By reason of this parallelism, there- 
fore, happiness may in incomplete and imperfect fashion serve 
to summarize the purposes of human endeavour. But even here 
we are not greatly helped, since it still remains to determine 
whose happiness shall be taken into computation and in what 
measure. How far does it rationally bear upon my manner of 
life that my descendants, or the race in general, are therein 
concerned? What are your duties to your neighbour? How 
shall you reconcile these claims with the adverse claims of 
others? And in what estimate shall be measured his hap- 
piness against the hapj^iness of others, if in the widening 
circles of heredity his well-being may seem to conflict Avith 
that of others yet to be? 

It must be taken as fundamental to all ethical discussion 



332 OUTLINES OF ECONOMIC THEORY 

tluit the well-being of tlie human race is the ultimate test of 
right action. Should this proposition fail to commend itself 

as axiomatic, reference to Section 225 must 
aitrui^^° suffice for argument, merely adding, however, 

that in the degree that the breadth and the 
power of the sympathetic faculty shall enlarge, will this 
abstract principle tend more and more to become a working 
emotional fact in the human mind — an instinctive moral 
guide. "It can be shown that in the last analysis egoism 
and altruism are one, that altruism is only an indirect or 
mediate form of egoism in which the motive is sympathy, i.e. 
a kind of feeling which results from a contemplation of suf- 
fering in others, and which is strong in proportion as the 
organization is delicate and refined. For this reason, and not 
because it is of a distinct nature, is altruism a far higher and 
nobler, though thus far, a much less powerful sentiment than 
egoism." — Ward, Dynamic Sociology, Vol. I. p. 15. 

262. The capacity for expansion of human needs and de- 
sires is the key to many fortunate tendencies in social life. 
Expansiveness It is the elastic spring which constantly pushes 
of desires. i^ien upward to new efforts and new acquire- 

Advantages. ments in industry, in art, and in science. New 

effort means new power. Mind and body develop with the 
activity drawn from new desires. Did each new achievement 
in production and thought bring with it no correspondingly 
larger task, but only larger ability for an equal task, progress 
would carry with it its own veto in progressive stagnation. 
Human history excellently illustrates this truth. Civilization 
has not maintained itself in the places of its beginnings, but 
has moved to colder climates. With the human race in posses- 
sion of something more than barbaric skill, the problem of trop- 
ical existence, so far as the primary needs are concerned, is 
over easy of solution. All food requirements are too readily 
provided for. The climate discourages any exercise of energy 
unless in face of an acute need. There are no such needs. 
Neither human standards nor human powers tend toward 
development in these conditions. 



POLITICAL ECONOMY AS AN ART 333 

In the temperate zones tlie necessities of comfortable exist- 
ence are to be had only on terms of such effort as to conduce 
to human development. The remunerations of effort are not 
over large, but are yet sufficient to induce effort where the 
putting forth of it is not extremely irksome. Yet evidently 
there was a time when the warmer climates offered more 
favourable conditions for the race, in view of the powers then 
possessed by it. Something more than bare necessities is 
requisite if civilization is to make a beginning — some surplus 
of time and strength after mere existence is provided for. 
But when human powers had developed so that men could and 
did avoid that measure of effort necessary to growth, progress 
ceased. 

It is worth remembering also that no high civilization has 
yet established itself in the frigid or semi-frigid zones. That 
necessary something above the minimum of existence is impos- 
sible there, for other than highly developed races. These de- 
cline the attempt. The Icelanders abandoned Greenland after 
a century or two of struggle and are now abandoning Iceland. 
Where, however, human perseverance was sufficient for the 
case, the outcome would probably be the failure of civilization, 
inasmuch as the compensations for effort are so meagre that 
energy would probably give place to languor, and effort adapt 
itself to the minimum standard of life. With sufficiently 
acute desires, humanity will one day probably become able to 
maintain civilization in tropic climates. 

263. For races, therefore, as for individuals, burdens should 
be apportioned to strength. Nor is there much choice be- 
tween the excess and the defect. For example, the athlete 
is as likely to suffer from over-training as is the scholar from 
under-training. Exercise may be carried too far for muscle 
as well as discipline for brain. A cold bath is a heljDful 
stimulus to the system able to set up the necessary reaction. 
Tasks accomplished make strength, ^ — abandoned, weakness. 
Exposure hardens where it does not injure. The same rule 
holds in the moral world. Temptation strengthens, but each 
human being may well pray to be delivered from too much. 



384 OUTLINES OF ECONOMIC THEORY 

Successfully resisted, it toughens moral fibre ; succumbed to, 
it works disintegration. 

The doctrine, therefore, of some currency among economists, 
that every rise in the standard of living is fortunate, and 
every new line of consumption, unless affirmatively injurious 
in itself, a benefit, must be taken as of something less than 
universal validity. Only that sort or that degree of consump- 
tion can be justified which in the getting or in the using makes 
for human well-being. 

264. It is difficult to estimate how much the actions and 
thoughts of each of us are influenced by the standards and opin- 
ions of others. The world is in the main ruled by something 
else than laws. The good faith of business has another basis. 
Such laws as exist rather rest on the general good faith than 
the good faith on the laws. We buy not upon our confidence 
in the public weigher or examiner ; we sell with scant reliance 
upon the collector or the sheriff ; we sleep with faith in some- 
thing else than the night police. The standards of all fur- 
nish standards for each. The faculty of sympathy, of which 
we have spoken, exhibits itself now in pity, in charity, or in 
self-sacrifice, again as an intense interest in the respect and 
approval of our neighbours. These customs of right living, 
borrowed by each from each, are the foundations of social 
safety. Here health is as catching as disease. The morality 
of the best of us is in a large degree conventional — made up 
from others' opinions, supported by our respect for others, 
imitated from the habits of others, reflected from men's inter- 
est and kinship for each other. There is no safety for you or 
me but in this mutual support in right living. Conscience 
mostly shines by the light of what others think of us. 

Yet not all aspects of custom and convention and neighbour 
interest are equally commendable. Within this field of 
inquiry are to be examined the economics of ostentation — 
the laws of show — the theory of appearing and seeming and 
being seen. 

265. If one looks for the most noticeable characteristic 
of that condition of social temper commonly described as the 



POLITICAL ECONOMY AS AN ART 335 

social question, lie will find it in discontent. We need not 
immediately inquire for the cause. Indeed it has several times 
been suggested that the social question is not 

. .• 1 - • £ Disadvantages. 

m truth one question, but a congeries oi ques- 
tions — a multitude of evils ; the remedy, a series of minor 
ameliorations. In human affairs there is seldom any sole 
cause for anything. 

And yet, commonly, we fail to appreciate the significance 
of this nineteenth century unrest. Nihilism in Eussia, social- 
ism in Germany, communism in France, coal 
and railroad wars in England, riot in London, ^® civilization 

o ' ' sound? 

mob in Brooklyn, pillage and arson in Chicago, 
rebellion in Colorado, pitched battles with government troops 
in the coal fields of Illinois and the iron districts of Pennsyl- 
vania, — and yet all these things have lost the dramatic char- 
acter of the unusual. They have become commonplace, they 
cease to interest us, and in this lies their greatest significance. 
Nor, indeed, are these symptoms of discontent confined to the 
wage-earners or the poor. Literature and art manifest all 
the signs of the same disease. Eomanticism idolizes the 
past 5 idealism reaches toward the future ; realism mocks 
the present. There is no literature of content in the world 
to-day. Optimism, even, is in essence discontent with the 
present. 

266. It is at first thought odd that unrest should especially 
mark the nineteenth century. The world is rich and growing 
richer, and wise and growing wiser. Never 
before would a day's labour bring so many dol- ^^"^ ^^^^' 
lars, or a dollar buy so much. Never did men 
work so hard, or their work return them so much. Science has 
revolutionized the arts of production. It has made levers for 
us of the powers of nature. San Francisco is now nearer to 
New York than was Boston a hundred years ago. The tele- 
graph has annihilated space for the passage of thought. You 
and I shall yet talk in whispers with London. Knowledge 
multiplies so that each year's product of it is a life-work for 
him who would follow it all; and somehow also through the 



336 OUTLINES OF ECONOMIC THEOKY 



wonderful interdependence of each, science with every other, 
and of the arts of industry with the science of industry, all 
this new knowledge counts us in some way for the business 
of everyday life. There is no man who has grown more corn 
than the chemist. Machinery is in one sense a tool and in 
another a harness for the forces of nature — a multiplier of 
human powers. The railway and the steamship have made 
the great cities and the great factories possible. The farmer 
at one end of the world and the artisan at the other have come 
into helpful relations of give and take, into unconscious but 
effective cooperation. The warehouses of all the world groan 
with the products of all the world's climates and of the talents 
of all the world's races. All things cheapen as measured in the 
sacrifice of human effort. We have conquered nature and we 
have conquered knowledge ; we have opened new continents 
with their fresh soils and new resources, and we have advanced 
upon them with new knowledge and new appliances. Man 
grows in will and skill, and nature widens in opportunities 
and helpfulness. From this new adjustment of the two fac- 
tors in production, man and environment, a larger, wealthier 
life is open to us, and it ought to be a greatly happier life. 
And yet we ask ourselves what does it all profit? Pass rapidly 

over in thought the question whether with all 
The failure. j_ ■ o i • , ,i 

our centuries of achievement we are so greatly 

better off than were the Greeks without. Is the greater rush 
and push of life a good thing in itself? In the stress of it is 
there found a compensation to make the effort worth the tak- 
ing? What does it mean that the insane asylums yearly build 
larger for minds unstrung by tension? How about the multi- 
plication of suicides? Likewise our prison populations are 
not disappearing as the good things of life become cheaper, 
but theft somehow grows out of plenty. 

There is a grim paradox in civilization somewhere. Wherein 
do we fail, or waste, or misuse? How is it that with all our 
opportunities, our harvests somehow do not altogether shield 
us from hunger or our looms from tatters? What does it 
mean that as science grows and wealth multiplies the cry of 



POLITICAL ECONOMY AS AN ART 337 

poverty swells louder and louder, and that discontent has 
become the fixed malady of our civilization? 

267. We are in face again of the old question of the 
standard of living. That which was once relative comfort has 
become privation — privation absolutely, in view of our higher 
standards of desire, privation relatively, in view of higher 
levels of comfort and luxury about us. If, on the one hand, 
expanding powers of satisfaction are to be regarded as a human 
gain, on the other hand, desires without the power of satis- 
faction must be counted for a misfortune. Thus what might 
be absolute gain in the absence of increased requirements by 
society, may be very truly a loss. Without the ability to 
satisfy it, a new need is a misfortune. 

We inevitably make our well-being largely relative. With 

an increasing industrial prodiict there have arisen new needs 

and desires. The causes which have made 

., , , ,, , The explanation, 

greater consumption possible have themselves 

made greater consumption necessary, — in some part because 
we have individually become adapted to different standards, 
for the most part because society about vis has set for us a 
different level. The cloth which once went with elegance is 
now the badge of poverty. The plainer and simpler would 
answer our purpose equally well were there no richer or more 
striking with which to make comparison — no outside standard 
with which we must comply. Thus our silks serve us no pur- 
pose which our homespuns might not serve; our palaces are 
not greatly better than our huts. Splendour, no matter how 
much labour it has cost, is not splendour when it has become 
general. All may as well stand still as run in an equal race. 
When things are measured by comparisons and averages, 
scramble and scrabble count for nothing but exhaustion. 
Thus material progress in the way in which we use it, — ma- 
terial progress so far as it is directed to competitive show, — 
cancels itself in a strife for precedence. There is no share of 
gain in it for any one, which does not stand for discontent and 
heartache for some one else. 

All ostentation is waste from the point of view of 



338 OUTLINES OF ECONOMIC THEORY 

society as a wliole. For the poor, it aggravates their 
poverty. 

268. Fashion takes its beginning in obsequiousness — in 
the attempt to propitiate a superior by imitation. Flunkyism 

still stands for something in the case, but a 
f^sMon°^° stronger force is now the dominant one — the 

desire to assert equality by similarity. But 
the chase after fashion is a chase for the end of a rainbow. 
The desire to be inimitable, to be distinguished and peculiar 
in glitter, is as strong with the leaders as is the disposition 
of the lesser people for imitation. The latter succeed and 
the leaders change. Worth spends all his time in devising 
new styles which shall minister to the demand for inequality 
and set again the great mob off the scent. It is clearly enough 
impossible, as the world goes, that the wealthy ladies should 
wear the same pattern that the servant girl may also get 
and will be sure to get if they buy it. 

269. We need to see this thing very clearly. The rich in 
carelessness of their responsibilities, the poor in their fool- 
ishness of imitation, are dissipating modern 

The results. . ^ r a 

progress m a general and therefore fruitless 

ministry to vanity. In the increase of wealth the rich get 
more numerous and more wealthy, the dividing gulf of discon- 
tent grows wider and deeper, and fashion flaunts itself more 
widely. In our false standards of well-being — our improvi- 
dence in the competitions of display — we not only waste the 
product of our own energy by an automatic method of cancel- 
lation by averages, but in wasting our own share of product we 
at the same time make our neighbour's share poor and mean 
and insufficient. We rob ourselves and yet filch from him. 
Poverty, though relative, is as real as ever before, since artifi- 
cial but none the less imperative needs leave as little as ever 
to spare for primary necessities. There is no cure for it but 
in rational standards of well-being. So long as by the expen- 
diture of one in empty magnificence another is compelled in 
stupid fear of stupid criticism to waste the raw material of 
his welfare, material progress must prove a delusion, and the 



POLITICAL ECONOMY AS AN ART 339 

old doom stand unrepealed — 'the poor ye shall have always 
with you. 

Our labour helps us to live only on condition that its result 
is a life-giving, life-developing product. Wealth is well-being 
only as it furthers human welfare. If the attractiveness of 
diamonds is all in their rarity, diamonds are a delusion and 
diamond worshippers fools. Were diamonds abundant and 
coal scarce, we should burn diamonds and worship coal. Half 
the shops upon our streets sell nothing but the commodity, 
display. 

The first law of ostentation is, then, this — that all ostenta- 
tion is waste ; the second law, that the luxury of the rich not 
merely causes but is the poverty of the poor. 

270. Political economists have something to answer for 
in this regard. Of all the problems awaiting solution under 
the competitive system, and of all the arguments proposed in 
favour of socialism, this of fashion is the most weighty. If 
the waste and envy and exhaustion of display can be avoided 
only by compulsory equality of Avealth, social welfare must be 
found in compulsory equality. Whether or not the economists 
can study them, there are better things in life than wealth. 
However market values fail to indicate them, the differences 
are great in the kinds of wealth and their uses. There is a 
deal of wealth in the world worse than none, a deal more not 
better than none. Yet all of it costs humanity 
in thought, strength, energy, leisure, pleasure, ^^^jf"^^^ ° 
The point was long since passed when more 
burdens were needed for the mere gain of exercise. Work 
also is good for us only so far as it is good for us. Enough 
develops us, expands us in health and strength and power of 
thinking. Too much is a strife for vain things to the outcome 
of weariness. Wealth is not the motive of life, and man a 
mere machine for its production. Man and manhood are the 
centre of all science, and political economy but one depart- 
ment in the art of living. If race welfare is indeed the test 
of right action, there is something not merely infinitely foolish 
but infinitely wicked in the rush of toadyism. The children 



340 OUTLINES OF ECONOMIC THEORY 

of America are ceasing to be born because children cost money, 
and because with all the demand for finery the fathers' income 
is insufficient for the children, while with all the demands of 
society for attention and strength, the mothers have no will 
to be mothers. From 1870 to 1890 the average of American 
families fell from 5.9 to 4.9. 

271. There is possible room here for exaggeration. Wealth 
is a good thing rightly used. There is no occasion to deride 

riches or comfort. Asceticism is as false a 
scheme of living as is imitation. The day of 
anchorites and pious dirty mendicants is past. Let men get 
what is worth while out of life, but be sure that what they get 
is worth while. True welfare is not in what others think, 
or abiding pleasure in their admiration, or sorrow in their 
criticism. This is very simple. Each must live his own life 
and his own needs. Whatever does no good when it is gained, 
is not worth getting. One cannot satisfy his hunger through 
another's eating. The standards or opinions of others are not 
our evil or our good. Remember also that that which is futility 
to one stands for envy and poverty to another. Pleasure is 
good, the things of comfort, and luxury, and art, and thought, 
and beauty are good, but only on condition that one needs 
them and enjoys them for himself and for their service to him, 
and not as reflected from some one's else desires or as pre- 
scribed by another's standards? 

272. The rich have also their responsibility here and their 
duty. Wealth and culture have a social service in their sav- 
ing influence toward higher standards of thought 

Responsibility o ^^^^ ^- ^^^ ^^^ away from the raging materialism 

of modern society. Expenditure of wealth in 
ostentation demoralizes, disturbs, and degrades. And note 
that the distinction is world-wide between luxury and osten- 
tation. That which the rich desire for itself and not as the 
badge of precedence or the target for silly envy, they may 
well have — but only on condition that they rather hide than 
flaunt it. Society is greatly in need of object lessons in plain 
living and high thinking. 



POLITICAL ECONOMY AS AN ART 341 

273. The purely economic aspects of fashion need not de- 
tain us long. It is a fallacy to su.ppose that the wastes of the 
rich are necessary for the employment of the 
poor. The consumption of the rich determines gmplov^he poor ? 
whether the labourer shall produce this or that, 
and not whether he shall produce at all. If the rich refrain 
in some measure from consumption, their savings profit society 
under the form of capital in the production of a larger social 
dividend. 

But the changing demands of vanity stand to society for 
more than mere waste and overwork. They corrupt art; they 
confuse and disturb the organization of industry. 

First, they corrupt art; no beautiful fashion, if once attained, 
is safe to stay. If grace and simplicity come as fashions, they 

go as fashions. The greed of novelty leaves 

. . . "^ Effects on art. 

the beautiful behind as antiquated, to be suc- 
ceeded by the ugliness of hoops and humps and wings. From 
champagne to plumes of slaughtered birds, from skunk skins 
to jewelry, there is nothing permanent but novelty, no custom 
but change. And note that as soon as nothing in art which 
is good can abide, there will be nothing really good. The 
great artists, if they work, must work for all time — for the 
centuries, not the seasons. When the best work can have 
but a butterfly life, there will be no best work. 

Fashion demoralizes industry and fosters starvation. Ware- 
houses are tilled with commodities to supply a demand which 

has vanished, or to forestall a demand which 

. Effects on trade, 

never appears. Disaster and rum result. A 

novelty strikes the popular fancy; there follow immense 
profits, intense production, multiplied factories, prosperous 
allied industries, growing cities, inflocking labourers, invest- 
ment, and speculation. Fashion grows cold when the com- 
modity becomes cheap and plenty; then failure, closad 
factories, cancelled capital, collapsed boom, idleness, hunger, 
and riot. Almost all industrial centres know something of 
this experience. All over the world there are Nottinghams 
regretting a banished lace industry. The foe of industrial 



342 OUTLINES OF ECONOMIC THEORY 



peace is ebb and flow, change and uncertainty. Fasliion in 
commodities is parent to business gambling, great fortunes, 
great losses, feverish activity, feverish lassitude, fluctuation, 
and bankruptcy. 

274. But all of this was better said hundreds of years ago. 

"He that loveth silver shall not be satisfied with silver, 
nor he that loveth abundance with increase; this also is 
vanity. 

" The sleep of the labouring man is sweet, whether he eat 
little or much, but the abundance of the rich will not suffer 
him to sleep. 

"There is a sore evil which I have seen under the sun, 
namely, riches kept for the owners thereof to their hurt. 

"But those riches perish by evil travail, and what profit 
hath he that laboured for the wind? 

" There is an evil which I have seen under the sun, and it 
is common among men : 

" A man to whom God hath given riches, wealth, and honour, 
so that he wanteth nothing for his soul of all that he desireth, 
yet God giveth him not power to eat thereof, but a stranger 
eateth it : this is vanity, and it is an evil disease. 

" Seeing there be many things that increase vanity, what is 
man the better? 

" For who knoweth what is good for man in this life, all the 
days of his vain life which he spendeth as a shadow? " 



NOTES 

It matters far less for the future greatness of a nation what is the sum 
of its wealth to-day, than what are the habits of its people in the daily 
consumption of that wealth ; to what uses these means are devoted. 

— Walker, Adv. Course, Sec. 382. 

The ultimate foundations of political economy lie deeper than the 
strata on which existing systems have been reared. The point of diver- 
gence between the present science and the true science lies farther back 
than ordinary inquiries extend. . . . Knowledge of men is the beginning 
of this science ; knowledge of the social organism of which men arc 



POLITICAL ECONOMY AS AN ART 343 

members is the middle and tlie end of it. Individual desires are molecu- 
lar forces in the general life of society, and to them all phenomena of 
wealth must be ultimately traced. It is by a deeper analysis than has 
been dreamed of in our philosophy, that we may hope to attain that 
higher insight, that knowledge first of man, and then of humanity, which 
is the basis of true economics. — Clakk, Phil, of Wealth, p. 54. 

Wants on the margin of actual possession are the active incentives to 
effort. Civilized man struggles no longer for existence, but for progres- 
sive comfort and enjoyment. Progress has limits, and many wants must 
remain forever unsatisfied. By a kindly provision of human nature such 
wants are generally quiescent. Other wants near to the border line of 
actual possession must be active, with a prospect of satisfaction by effort, 
if happiness is to be attained. It is the want of things which lie far 
above the line of necessities, and the consumption of which would be 
classed as unproductive, which is the constant motive power in industrial 
progress. The comforts to be enjoyed to-morrow set in action the muscu- 
lar energy gained by the food consumed to-day. It is the so-called 
unproductive consumption which, if soul forces be recognized, is produc- 
tive of wealth. — Claek, Phil, of Wealth, 54. 

A distinction must be drawn between the motives which incite man to 
seek wealth ; they are of two different kinds, and correspond to two 
aspects under which the idea of wealth is presented. Men seek wealth, 
both to satisfy their wants and to mark themselves off from their fellows ; 
they are urged in the former direction by the desire for well-being, in the 
latter by the desire for inequality. ... It is the desire for inequality, 
or, if you will, what comes exactly to the same thing, the desire to rise 
above the common level, which is the ceaseless goad of man's natural 
idleness. — Gide, Political Economy, p. 32. 

And now the world will have to pause a little and take up that other 
side of the problem, and in right earnest strive for some solution of that. 
For it has become pressing. What is the use of your spun shirts ? They 
hang there by the million unsalable ; and here by the million are dili- 
gent bare backs that can get no hold upon them. Shirts are useful for 
covering human backs ; useless otherwise, an unbearable mockery other- 
wise. . . . The wages of every noble work do yet lie in Heaven or else 
nowhere. At bottom dost thou need any reward ? Was it thy aim and 
life purpose to be filled with good things for thy heroism, — to have a life 
of pomp and ease, and be what men call "happy" in this world, or in 
any other world ? I answer for thee, deliberately. No. The whole spirit- 
ual secret of the new epoch lies in this, that thou canst answer for thy- 
self with thy whole clearness of head and heart, deliberately. No. My 



344 OUTLINES OE ECONOMIC THEORY 

brother, the brave man has to give his life away. Give it. I advise thee. 
Thou dost not expect to sell thy life in an adequate manner ? Give it 
like a royal heart ; let the price be nothing ; thou hast then, in a very 
certain sense, got all for it. — Carlyle (England), Past and Present. 

Eranklin remarks that our eyes, although very useful, require nothing 
more for themselves than a pair of spectacles, an outlay which ought not 
greatly to disarrange our finances ; it is the eyes of others that ruin us. 
If all the world were blind excepting myself, I should have need neither 
of fine raiment, nor of palaces, nor of extravagant furnishings. 

— Letter dated at Passy, July 26, 1784, to Benjamin Vaughan. 

P. What riches give us let us then enquire ; 
Meat, fire, and clothes. B. What more ? P. Meat, fine clothes, and 
fire. — Pope. 



TAXATION 



275. The different rules proposed for the imposition of 
taxes were shortly examined in Section 155. It was there 
suggested that an approximately ideal system would probably 
recognize in each of these different rules some element of 
validity. 

There are a few generally admitted principles. Taxes 
should be such as not to require a large cost of collection 
relative to receipts. As far as possible, premiums upon dis- 
honesty should be avoided. Collection should take place as 
near as practicable to the point of consumption, in order to 
avoid the payment by the consumer of interest and profits 
upon the tax payment. 

There is great difficulty, however, in fixing upon any just 

and practicable system of taxation, so far as refers to the 

basis of it. That taxation of some sort is una- 

^^nis voidable follows from the fact that for humanity, 

in its present stage, the right to tax and the 

right to exist are one. The objections to taxation proportioned 

to wealth, omitting to take account of the uses to which that 

wealth is put, whether to charity and philanthropy or to vice 



POLITICAL ECONOMY AS AN ART 345 

and luxury, are sufficiently evident. It is also clear that 
taxation upon any of the implements of production, as for ex- 
ample factories, lines of transportation, etc., largely fall on 
consumers. There is danger, also, that taxation proportioned 
to wealth simply, should tend to the discouragement of cap- 
italized savings, in the degree that the tax is not shifted to 
consumers. Taxes on interest receipts mostly shift. (Sec- 
tion 157.) 

276. By reason of this shifting process taxes on interest 
work out in extreme injustice. Commonly, indeed, the very 
people intended to be favoured are most 
burdened. A possessor of five thousand dollars 

in property, owing four thousand dollars, is worth, in fact, but 
one thousand dollars, and yet pays taxes not only upon his 
five thousand dollars' worth of property, but in some part 
upon the indebtedness against it. Recalling to mind that for 
every credit there is a debit, and that cancellation of this 
credit relationship would work no change in the aggregate of 
social wealth, taxation upon interest is seen to be in effect 
double taxation upon wealth. 

Taxation proportioned to the benefits derived from govern- 
ment would largely exempt the very people best able to pay, ■ — ■ 
those best able to dispense with the aid or protection of the 
State. The millionaire is not benefited a thousandfold more 
than the humble householder. The pauper is greatly benefited, 
and yet pays nothing. Taxation necessarily avoids the very 
poor, else that which is taken under the form of tax must be 
returned as public charity. 

Taxation according to ability to pay would require careful 
examination of the properties owned, whether income paying 
or other, and as well would require careful account of the 
family and social obligations recognized and fulfilled by the 
contributor. The father of a large family does not stand for 
this purpose upon a level with the bachelor. 

277. And yet on the whole the scheme of taxation accord- 
ing to ability to bear the tax, recommends itself as the best 
approximation to fairness and practicability. Burdens are 



346 OUTLINES OF ECONOMIC THEOEY 

thereby apportioned to strength. Upon this line of reason- 
ing the income tax is commonly regarded as the ideal tax, 
to the extent that it can be made practicable in 
operation. A progressively higher rate of tax- 
ation is commonly advised with increasing income. Here 
again the difficulty presents itself of making allowances for 
the different uses to which incomes are put. One who has a 
large family to support and educate, or who applies a large 
proportion of his yearly receipts to the support of philan- 
thropy or charity, has a strong case for corresponding exemp- 
tions, could these exemptions be made practicable. 

278. Proceeding, however, upon the basis of income — of 
tax on faculty, a rational and practicable system is within 
reach. 

Let it be recalled that all taxes are, in ultimate incidence, 
taxes on consumption (Section 159) ; that no one gets any 
benefit of his wealth, otherwise than in the mere power and 
pride of possession, till he comes to use it; and that taxes 
uj)on luxuries and vices are particularly to be favoured as 
involving the minimum of interference with both liberty and 
well-being. (Section 160.) 

If, now, all taxes were drawn from that portion of income 
which goes for the consumption of the contributor, no philan- 
thropist would stand under penalty for his 
Taxonexpen- charities. There is no occasion to tax savings 

diture. _ ° 

as long as they are represented by factories, or 
until they are turned by the owner to his own benefit. Seed 
at the time of planting is best exempt. Wait for the harvest. 
If the owner of wealth is taxed prior to the time of consum|)- 
tion, he is taxed for that which has not yet served him, and 
may never come to service. This tax, also, is certain in 
some measure to shift. 

279. Incomes, then, should be taxed not by the measure 
of receipts, but by the measure of expenditure, — not by 
income, but by outgo. This principle has been put into suc- 
cessful operation by the French. The dangers of perjury, the 
premiums on dishonesty, and the general impracticability 



POLITICAL ECONOMY AS AN AKT 3i7 

wliich have attended all attempts at income taxation in 
England and America, as well as the injustices and the 
shifting which mark income taxation when proportioned to 
receipts, are all avoided by adjusting the tax levy upon the 
basis of the outside indicia of expenditure; for example, upon 
the rental value of the home, the amount of furniture, the 
number of servants and horses. Undoubtedly the system 
requires skill in the selection of leading facts and in the appor- 
tionment of their relative weight, but amounts in outcome to a 
tax on that portion of income expended for personal uses. 

Clearly, however, this system is not ideal if no allowance 
is made for the exemption of incomes at or below the mark of 
strict requirements, or if no provision is made for progressive 
burdens upon larger incomes. These modifications provided 
for, this form of income tax burdens the wealthy in propor- 
tion to their ability to bear the burden. Nor is it to be con- 
demned thereby for injustice, in view of the fact that society 
as a whole furnishes the organization and the civilization in 
which alone great wealth becomes possible. 

280. If, however, the rich are to be taxed in the measure 
of their capacity, so ought also the poor. Whatever is spent 
for vice or for luxury in any stratum of society, 

is by that fact proved not indispensable. Here ^^^^ °^ ^ 
is opportunity to tax the poor to their benefit, 
or, at all events, to no great injury or burden. All of these 
taxes may be avoided by abstention from consumption. Should 
taxation of this sort seem to savour too much of paternalism 
and of sumptuary legislation, — if it is objected that there is 
too great room here for mistaken, extreme, or dogmatic meas- 
ures, — the answer is that the State must follow what light it 
has. Taxes must be collected. They fall of necessity upon 
one sort or another of consumption. The State is bound to 
collect its revenues with as little harm as possible. 

281. There remains yet one method of taxation ideal in 
fairness and in freedom from oppressive character — the tax 
on future unearned increments in land values. (Section 282.) 

Probably, also, a high rate of taxation on successions and 



348 OUTLINES OF ECONOMIC THEORY 

inheritances will be found to furnish large resources to the 
State. No valid objection appears to this sort of taxation 
from any point of view. From various points of view its 
advantages are great. 

Taxation upon monopolies will best be treated under another 
head. 

Under our form of government income taxes should probably 
be collected by the national government, as should also vice 
and luxury taxes, as far as they are levied under 
taxes ^'^'^ °^^^ *^® form of tariff or of taxes on production. 
Inheritance and land taxation and all forms of 
taxation upon consumption, by license methods, are probably 
best placed with state and local governments. 

It is worth noting as a matter of experience that taxation 
upon personal property is impossible, consistently with jus- 
tice, and commonly fails for the most part of enforcement. 
In almost all communities, and especially in the newer com- 
munities, land taxation affords nearly the entire revenue. 
Unfortunately, however, no distinction is made between land 
and improvements. 



THE SINGLE TAX 



282. Refute the proposition that inasmuch as all food 
products and all raw materials are obtained from the land, 
therefore land is the source of all wealth. (Section 67.) 

What have modelling, fashioning, transporting, etc., to do 
with it? 

How many factors in production are there? Would interest 
be possible without the reproductive forces of nature? Is 
opportunity more truly primary than activity? Is land more 
truly than man the primary condition to wealth? 

Is control over the industrial product more readily exercised 
through ownership of land than through ownership of capital 
or of labour-capacity? 

Suppose all land-owners could combine; what factor in pro- 



POLITICAL ECONOMY AS AN ART 349 

duction would then be in control? Can land-owners combine 
effectively? Why? 

Suppose all labourers could combine; would they be equally 
at advantage? Which sort of combination would be more 
easily made? 

Refute the arguments (1) that all improvements in trans- 
portation tend to increase rents, (2) that all improvements in 
agricultural arts and processes tend in the same direction. 
(Section 79.) 

It is true, however, is it not, that all cheapening of manu- 
factured products operates as an increase in the purchasing 
power of rents? 

283. Whether land should be owned individually or socially 
is a question of expediency to be determined by the general 
interest of humanity. 

It is clear enough that state ownership of land, in the form 

either of state cultivation or state landlordism, is open to all the 

objections applicable to socialistic production. 

As far as state landlordism is concerned, all ^^f'^ ^°?f. *° . 

' state cultivation. 

the objections apply which apply to the land- 
lord-and-tenant relation generally. The best administration of 
land requires ownership in the cultivator, otherwise the inter- 
ests of the tenant are adverse to permanent improvements and 
in favour of the misuse of the land, in aid of immediate returns. 
The tenant can hardly be expected to improve or fertilize for 
the benefit of the landlord or of a later tenant. 

Opponents of private profits from increasing land values do 
not, however, advocate state landlordism, but only such high 
taxation as shall preserve to society the major part of the 
increase, but shall yet leave all the forces of individualism in 
working condition. 

Careful examination of the different arguments in favour of 
the land tax ought to convince the student that, overlaid by a 
deal of sophistry, there is a sub-stratum of hard fact in the 
single-tax proposition. The evils of speculative ownership 
and unearned profits are unquestionable, but are greatly exag- 
gerated. The system of private ownership has long existed, 



350 OUTLINES OF ECONOMIC THEORY 

and labourers' wages, capitalists' interest, manufacturers' 
profits, are now represented by landed investments. If soci- 
ety sees fit to secure to itself by progressive taxation future 
advances in land, values, it will therein be wise. Wholesale 
appropriation of accrued values is wholesale robbery. 



THE EIGHT-HOUR DAY 

284. Recalling that wages, though fixed, by the adjustment 
of supply and demand, are determined by the productivity of 

labour, as the measure of demand and of the 
^^d^T°°° maximum ability to pay wages, — that therefore 

wages must be drawn from product, and that 
competition measures interest and profit from the level of 
marginal services, — it is clear that the effect of the eight- 
hour day on wages must be determined by its effect on the 
social dividend. All attempts to obtain high wages by making 
labour scarce, or its aggregate product small, rest upon sheer 
fallacy, unless the restriction be limited to one industry and 
that industry be one in which the monopoly principle may be 
applied. (Section 154.) Even here not employers but con- 
sumers must finally pay the costs of the artificial rise. Em- 
ployers pay wages as fixed by the selling price of their 
products. Shorter hours and relatively high compensation 
for labourers would quickly recruit the ranks of wage-earners 
at the expense of agricultural or other labourers. 

The question thus remains twofold : (1) Will the aggregate 
production be lessened by the change to an eight-hour day ? 
(2) If so, is the change desirable ? 

285. (1) Clearly enough, as a question of maximum prod- 
uct, a twenty -hour working day would not be desirable. 
Indeed in most industries a twelve-hour day is probably unde- 
sirable as compared with ten hours. As clearly, this shorten- 
ing process may go too far. That sixteen was an improvement 
on twenty, or ten on twelve, does not conclusively recommend 



POLITICAL ECONOMY AS AN ART 351 

the eight-hour day as against the ten. Much depends upon the 
industry, much also upon the national characteristics of the 
labourers. Probably, in the average, productiveness would 
fall with a change to eight hours. 

(2) Is this necessarily an ill? Is leisure good for any- 
thing? On what conditions ? How about health and con- 
tent ? Would five ten-hour days per week or six eight-hour 
days be preferable, (1) as question of product, (2) as question 
of the health and pleasure of life ? 



APPRENTICES 



286. Attempts on the part of labour unions to limit the 
number of apprentices for the purpose of holding up wages, 
may be successful in any one industry. Bearing in mind, 
however, that wages in the average must fall with falling 
social dividend, it follows that for wage-earners as a whole no 
method of reducing or cancelling the effectiveness of labour 
can conduce to higher average wages. The general interests 
of society cannot profit through preventing wage-earners from 
becoming skilled workmen. The profits, indeed, which accrue 
to the labourers in one industry by this process of restriction, 
must be largely cancelled as other industries come to practise 
the same methods. (Section 154 and notes.) 



THE SWEATING SYSTEM 

287. What fixes the wages of employes in sweatshops? 
(Section 122.) 

Do the employers make unusually large profits or is compe- 
tition probably fully active among them? 

Do the merchants make large profits in the handling of 
goods from sweatshops, or is the margin one of close com- 
petition? 



352 OUTLINES OF ECONOMIC THEORY 

With as many dozen shirts to sell, is it possible to maintain 
higher prices and yet sell all the shirts? How arrange to get 
higher prices per shirt? What must be the effect on the 
labourers if only as many shirts are sold as can be sold at 
high prices? 

What effect (1) on employers, (2) on labourers, if wages are 
increased without increasing the price of products? 

Is the purchaser of sweatshop products doing a benefit or an 
injury to the employes? What if the shirts could not be sold? 

288. The conditions of bad sanitation, bad water, bad 

food, ignorance, vice, disease, and crime characteristic of the 

sweatshop are well known. Merchants find it 
Description. 

convenient and prontable to let the making up 

of fabrics to the lowest bidder. These successful bidders, 
the sweaters, undertake to find the necessary labourers. 
The work, undertaken at starvation figures, must be placed 
among people compelled to work at starvation wages. The 
fabrics are therefore distributed for making up among the 
ignorant and vicious in quarters of cities foul with stench, 
filth, and disease. The labour is performed in garrets and 
cellars or in sick-rooms among sufferers with all sorts of 
contagious ills, where the uncompleted garment may serve 
as the pillow or cover of fever, cholera, or smallpox. On 
the counters of the great wholesale or retail establishments 
these sweated garments furnish the material for great bar- 
gain sales or attractive trade discounts. 

The notion exists among many people that the only thing 
necessary to cure this great evil is for the State to prohibit 
letting or receiving work at these low figures. It remains, 
however, to ask what these ignorant and inferior workers will 
do if prevented from earning these small wages. Were some- 
thing better open to them, it would be unnecessary to prohibit 
this line of employment. Or again, it is urged that purchasers 
should refuse to buy garments made at starvation wages. How 
would these starved labourers be better off? Unless their 
product can be sold for little, it cannot be sold at all. (Sec- 
tion 122.) 



POLITICAL ECONOMY AS AN ART 353 

289. It may be, however, that as a measure of public 
health, the State should attempt supervision and regulation of 
the sweatshops. It probably is true that the inmates might 
in many cases do better paying work if they could find it, 
and would often find it if they were aware in a general way of 
its existence, or if they were not wanting in energy and self- 
direction. Something is possible here through charity and 
education. But in any event the remedy will have to begin 
at the labourers. Uninformed denunciation of the system, or 
of the merchant, or of the intermediate employer will do little 
good; nor will the corresponding schemes of remedy serve. 
For this class of labourers the choice is between sweatshops 
and something worse. 



LABOUR OF WOMEN AND CHILDREN 

290. Courts and lawyers have established the rule that 
in case a parent is shown to be affirmatively unfit to care for 
a child, a guardian may be appointed in his place. Merely as 
a matter of protection to the child, in some cases it becomes 
justifiable to limit or suspend the usual authority of the 
parent. 

The labour of children in shops or factories is injurious both 
positively and negatively, — positively in weakness and stunted 
growth from over-arduous tasks, negatively in loss of oppor- 
tunity to prepare for the more important tasks of later life. 
These conditions of disadvantage tend to reproduce them- 
selves. When the child-labourer matures, he in turn finds 
himself unable to give his children proper care and education. 
Thus in justice to the unborn children as well as to the living, 
some sort of restriction upon child labour is desirable. If 
parents are unable ^^nder present conditions properly to pre- 
pare their children to live, there is the clearer necessity that 
the next generation be not worse equipped. 

General considerations, therefore, favour state interference 
2a 



354 OUTLINES OF ECONOMIC THEORY 

in these matters. Any rule must, however, be very flexible in 
application. Parents or even whole families are in some cases 
in considerable measure dependent upon the services of chil- 
dren, where state aid could not be recommended and would not 
be received. The self-respect which goes with independence 
is a valuable quantity. Authority should exist to handle 
these cases after their exceptional character; otherwise the 
protection of children may work out at tyranny for both 
parents and children. 

291. The labour of women stands economically and socially 
upon other grounds. Where women's labour in shops or fac- 
tories is necessary to a wholesome plane of 
living, it is doubtless to be regretted. But that 
it is to be regretted makes it none the less necessary. Espe- 
cially for married women are the effects bad in lower physical 
tone, and in neglect of important home duties. 

Whether in any case a woman's labour is necessary is prob- 
ably best left to her own decision or that of her family. There 
is small occasion for the State to interfere otherwise than, as 
for other labourers, to prescribe conditions of good sanitation, 
light, heat, and safety. These latter matters are not well 
left to normal adjustment. Competition without regulation 
works out in this regard in higher wages for recklessness and 
higher profits for inhumanity. 

There may well be regret for the necessity of wage-earning 
by women ; but the active opposition to it rests upon the per- 
nicious fallacy already many times remarked, that the com- 
petition of women reduces the wages of men by an amount 
equal to the wages of the women and possibly by more. It 
is assumed that wages are a fixed quantity and the social divi- 
dend inelastic, instead of depending upon the effectiveness of 
productive forces. If women's labour adds to the social prod- 
uct, it necessarily adds to the aggregate of wage receipts. 
Obviously, however, if the competition of women centres in 
some one or some few industries, the wage level therein may 
be seriously lowered and, conceivably, the wage aggregate de- 
creased. (Section 142.) 



POLITICAL ECONOMY AS AN ART 355 



THE UNEMPLOYED 

292. In the background there still remains the problem of 
the unemployed — the most important practically and perhaps 
the most difficult theoretically of all the prob- 
lems of economic science. Theory and fact here ^°''™^^ ^°^' 

^ employment. 

seem somehow out of harmony. It is easy to 
argue that the consuming power of society is unlimited in 
comparison with its productive abilities; that so long as 
there are desires yet unfulfilled, there can be no failure in 
the demand for labour; and that employment must somewhere 
await the out-of-works, the difficulty being merely to bring the 
demand and the labourer together. It is easy, also, to assert 
that the unemployed lack employment by their own fault, and 
that would they accept the opportunities which offer at the 
wages which offer, the solution would be easy. And it is 
doubtless true that a large proportion of the beggars, the 
tramps, the patrons of night shelters and free soup counters, 
who whine their eagerness to work, could work be found for 
them, are lying. But imagine yourself in a great city, even 
in prosperous times, seeking employment. Ask yourself to 
whom you would apply. It helps little that the demand is 
there if you cannot find it. The very employer seeking further 
help will probably not accept you; he does not know you. 
Who are you? what are your credentials? why are you not 
already at work? He can wait — you cannot. He seeks a 
contented, steadfast, trustworthy servant. You may be all 
this, but he does not know it. For his purposes, therefore, 
you are not all this. He needs more than an efficient worker, 
more also than a trustworthy worker; he needs one whom he 
knows to be both efficient and trustworthy. 

All these adjustments of supply to demand take time. An 
employe losing his place and finding another within thirty 
days may count himself fortunate beyond the average. The 
intermediate period is to be charged up to friction, lost 
motion, in the interplay of demand and supply. This loss 
quantity is never a small one. Consider the transformations 



356 OUTLINES OF ECONOMIC THEORY 

constantly occurring in modern industry, — new inventions, 
new processes, new factories, changing demands of time and 
season, new fashions, new centres of trade, bankruptcies, 
retirements, restrictions of output, new schedules of tariff, 
speculations, booms, strikes, and lockouts, a very kaleido- 
scope of change, — and one begins to appreciate the causes 
which lie back of disturbances in employment. Give each 
change its time for completion, for the fitting of each in- 
dustrial block to its new niche, and the phenomena of non- 
employment are seen to be inevitable. The best-disciplined 
regiments require time for reforming after ranks are broken. 
The streets are thronged with people, by the mere going to 
and fro from one place of business to another ; for several 
hours of the day the ways are tilled with passers to and from 
their meals. 

There is, then, a normal and, in a certain sense, healthful 
volume of non-employment. We have already had occasion 
to note that periods of crisis and depression aggravate this 
condition to one of veritable disease. So far, however, as 
non-employment is connected with currency phenomena, dis- 
cussions of remedies must be deferred to a later chapter. 

293. Even were seekers of employment informed of the 

various opportunities for employment, and did questions of 

fitness and proof of fitness present no difficul- 

Inertia of labour. ,. ,, t t , ■^^ ^ . o 

ties, there would still be a great measure of 

immobility in labour, resulting in non-employment. Men dis- 
like changes of home even if they are able to make them, and 
are often unable to make them even if disposed. When, for 
example, the lace factories of Nottingham close for lack of 
demand, it is small help to the operative that in Glasgow or in 
Dublin there is employment in ship-building or iron-working. 
Assume for the time being the ability to change from loom to 
forge. Assume, also, the knowledge of the opportunity and 
the disposition to embrace it. But the workman cannot move 
his cottage. It is, indeed, common enough that he is unable 
to undertake the expense of moving his family and personal 
belongings. And always the risk of misfortune or failure 



POLITICAL ECONOMY AS AN ART 357 

is menaced by new surroundings, strange people, and new 
methods. 

Nor have we yet done with the important influences recruit- 
ing the army of tlie unemployed. The leading characteristic 
of the modern industrial system is the division 
of labour. As has already been remarked, this EJfeot of division 

... . °^ labour. 

principle applies not only to individuals, but in 
large degree to communities, states, and nations. In soci- 
ology as well as in biology, specialization of function involves 
interdependence. In complicated machinery, when one wheel 
fails to turn, all stand still. In our present society pro- 
duction depends upon exchange. The agriculturist employs 
the mechanic and vice versa, — the steppes of Kussia, the 
workshops of Germany. So if the American Northwest ceases 
to produce, and in default of production ceases to buy, the 
industrial centres experience a partial paralysis. A crop 
failure in several states, chiefly agricultural, works some 
measure of non-employment in those manufacturing centred 
with which the barter of commerce commonly 
takes place. At the best, the manufacturer must 
reach out to new and difficult markets of low profit-paying 
quality. Shut out by trade restrictions from the world's 
currents and price levels, the process is necessarily slow and 
painful. For the agricultural states the case is evidently 
still worse. 

In short, there comes about a condition of want, of acute 
necessity, which yet affords no demand for present labour, 
but rather for immediate purposes a diminished . demand. 
Ultimately, we must remember, product furnishes demand 
for product. The Northwest will not demand hats or shoes 
until it can produce wheat or meat. The manufacturing states 
must do their exchanging with such agricultural producers as 
have produced. Low prices, therefore, tend to follow for the 
products of the factory. Possibly enough, also, slow or hard 
collections in the districts of crop failure may permanently 
embarrass some centres of production. At all events, the 
condition is one of abnormally low social product accompanied 



358 OUTLINES OF ECONOMIC THEORY 

for a time, not by correspondingly large outlay of productive 
energies, but by a reduced outlay. The world acutely needs 
more grain and meat. What of it? It must wait until 
another year. This larger requirement will mean increased 
activity when next year comes; it means stagnation now. 
Agricultural production is mostly periodic. Were the ques- 
tion one of hats or shoes, a disproportion of product to wants 
would bring about a stimulus to production. ISTot so with the 
industries of agriculture. When these fail in product, it is 
an empty mouthing of generalities to assert the adequacy of 
employment as the necessary corollary of hunger. Months 
must pass before agriculture will renew its opportunities of 
employment. Other industries are over-manned at present, in 
view of the abnormally restricted market. Even did they 
offer possible employment, they are so far away as to be prac- 
tically inaccessible. That agriculture is prospering on the 
other side the equator helps the agriculturist on this side not 
at all, and the manufacturer not much. 

294. Recurring conditions of non-employment are thus 
inevitable in society as at present organized. But the diffi- 
culty is not fairly to be ascribed to the manner 
of organization. It results from the uncertain- 
ties of climate and the periodic nature of agricultural produc- 
tion. These failures of product could not be avoided under 
any circumstances. Systems can differ only in their manner 
of distributing the disaster. Socialism is clearly enough bet- 
ter adapted for this distribution than is the competitive form 
of society. It is, indeed, possible that socialism would fail in 
precisely the other direction — in an over-ready and therefore 
over-wasteful distribution and consumption of a food supply 
insufficient at the best. (Sections 135, 236.) The best ame- 
lioration possible under the present system is to be found in 
the postponement of all works of national or municipal im- 
provement to seasons of labour stagnation. Work performed 
by men who would otherwise be idle costs society nothing. It 
is saved energy. There is no excuse for public work in times 
of brisk employment unless the need is immediate and acute. 



POLITICAL ECONOMY AS AN ART 359 

In times of lax employment the choice lies between public 
enterprise, public charity, and suffering. The public should 
borrow for public work in times of depression and pay in 
times of prosperity. Bonds payable after a short period at 
the public option should be regarded as an emergency resort. 
Public finances in easy times should always be conducted with 
this in view. 

Doubtless states have gone too far in providing employment 
for the out-of-works. But there is a certain amount of public 
improvement which is inevitable. For the purposes of the 
present argument, the choice is merely as to the time at which 
public work shall be attempted, and to which payment shall 
be postponed. That amount of work which must in any 
case be performed should be performed at the period of low- 
est social cost. 

295. The bearing of the competition of the unemployed 

upon the wages of labourers in general deserves examination 

at this point. Seekers of employment readily 

make concessions. Why does not this place ^l'° '^""^ ^ 
•^ ^ and wages. 

the employe at the mercy of the employer? 
What stands in the way of enormous employers' profits? 
What maintains the wage share at a fair distributive portion? 
Shortly, the employers' indisposition to hire a poor labourer, 
and the consciousness of his inability long to retain a good 
one at inadequate wages. The employer acts in view of the 
competition of other employers. This applies as well to un- 
skilled labour; and it is to be held in mind, also, that there 
are all degrees of worth and worthlessness in unskilled labour. 
The history of industrial enterprises and the proportion of 
failures therein prove that, with occasional glaring exceptions, 
competition is active and effective in the labour market as in 
other markets. 

In times of depression, employed wage-earners may seem to 
suffer from the fierce competition of the unemployed. Wages 
are, in truth, forced down nominally — possibly also in some 
localities really. Yet these periods are not periods of great 
employers' profits, but just the contrary. With falling prices 



360 OUTLINES OF ECONOMIC THEORY 

of products, nominal wages must fall, or tlie employer be forced 
to restrict his product or to discontinue production. In the 
interest, then, of the maximum social product, which is ulti- 
mately the interest of the wage-earner, wages must fall to a 
level permitting the maximum utilization of all the produc- 
tive energies of society. This aspect of the case, will, how- 
ever, receive full discussion in Sections 300, 301. 



CURRENCY 



296. The commercial panic has been several times referred 
to as the most noticeably weak point in the present industrial 
system, 

No society organized on lines of division of labour and com- 
petition can function successfully without a medium of ex- 
change and measure of value. (Section 168.) It is idle to 
look for the disuse of credit methods in business (Section 212) ; 
and, as we have seen, the tendency is always strong to use the 
medium of exchange as a measure of value, not only for cash 
or short time exchanges, but as well for the long time ex- 
changes called deferred payments. (Section 201.) Cash and 
credit transactions shade off into each other practically as 
well as theoretically. 

297. We saw in Sections 163, 164, that the injustices which 
attend a fluctuating standard of deferred payments, could be 

avoided by the use of the multiple or commodity 
standard Standard, payment being still made in currency, 

but the amount of currency being determined by 
reference to statistical tables. It is quite another question 
whether the paralysis of business, both of production and of 
exchange, which follows upon the commercial crisis, could be 
avoided by granting debtor or creditor the right to have the 
terms of payment determined in this manner. Actual com- 
modity payment would be both unjust and impracticable. The 
debtor could rarely make it, and the creditor rarely conven- 



POLITICAL ECONOMY AS AN ART 361 

iently receive it. Payment in symbols would remain neces- 
sary. The stringency for money currency in place of credit 
currency would still be possible and probable. Forced liquida- 
tion would still occur, and such cases of insolvency as came to 
light would complicate business conditions, and compel the 
readjustment of property holdings. Insolvencies due to the 
mere appreciation of currency would, however, in considerable 
degree be avoided by the very fact of decreased fluctuation. 

298. The evils of panics, it must be remembered, are due to 
the fact that in a society organized upon lines of division of 
labour, production depends upon the possibility stagnation 
of exchange. When the mechanism of exchange results from divi- 
is dislocated, factories close, production lessens, ®^°° ° ^^^o"""- 
and wage-earners are subjected to acute suffering. Society is 
thrown back upon the system of barter or upon the necessity 
of adjusting its volume of exchanges to a lower volume of 
currency. This is possible only through fall in prices. This 
fall in prices pushes some debtors into insolvency, and where 
these debtors are at the same time employers of labour, locks 
the doors of enterprise. In this view the multiple standard 
becomes important, not merely in the interests of justice, but 
as a palliative of industrial stagnation. 

It is too much to expect, however, that any amelioration in 
currency methods will fully counteract the fluctuating tenden- 
cies of credit, or will prevent the alternation of periods of 
expansion with periods of liquidation. A wavelike movement 
in prices is unavoidable where credit serves as currency, though 
the roll may become less marked and the trough less deep. 
No substitute currency will inflow automatically or can be 
practically supplied till a need has manifested itself. Falling 
prices must be the evidence of this need. After the ebb in 
credit and the process of liquidation have commenced, the 
most that can be done is to make the process as easy and as 
free from disaster as possible. So far as the evil results are 
not due to the discovery of insolvency in business, they are 
due to the effect on production and exchange of a fall in jDrices. 
Men who could pay their debts at the old price level become 



362 OUTLINES OF ECONOMIC THEORY 

insolvent by tlie fall. Men who could borrow for their busi- 
ness needs now find it impossible. Men with currency in 
hand exercise the option of retention (Section 181), rather 
than immediately to invest or expend; currency is thus 
practically withdrawn from circulation. Lenders of currency 
are timid and withdraw their holdings from circulation. 
Prices tend toward further fall. This discourages the pro- 
duction of commodities by employers. Men are discharged. 
Not producing, they cannot buy of producers in other indus- 
tries. Still other men are thereupon thrown out of employ- 
ment. 

299. Thus far the case is not difficult of analysis. But 
there are some difiicult underlying questions. Debts and 
credits add nothing to the wealth of the world, 
so enduring^'^^~ ^^^ ^° they subtract. Doubling or halving can- 
not affect the social aggregate of wealth but 
simply its arrangement in point of ownership. A general fall 
in prices is equivalent to an increase of indebtedness. The 
injury to the general well-being cannot therefore be explained 
by enlarged indebtedness, otherwise than as the change in 
conditions works out to change the aggregate production and 
consumption of society. 

All societies organized upon lines of division of labour are 
very sensitive to derangement, from the fact that with them 
production is conditioned on exchange, and that reduced pro- 
duction in one direction tends to cause reduced production 
elsewhere. Disturbed exchanges may, therefore, be expected 
to bring about reductions in the social dividend, as well as 
inequality and injustice in distribution. The hard times 
which follow panic are explained by reduced production 
lowering consumption and reduced consumption reacting to 
lower production. 

Therefore for the understanding of commercial depressions 
it is not sufficient merely to explain the closing of factories 
through business reverses, but also to explain why they do 
not open. Why is the condition of depression so enduring? 
With numbers of labourers wanting food, and numbers of 



POLITICAL ECONOMY AS AN AET 363 

farmers wanting manufactures, why does each side fail to pro- 
duce for lack of the opportunity to sell ? Why do these wants 
fail to meet? How explain the long-enduring inability of 
supply to exchange with supply? 

300. The explanation is found in the imprenditor system, 
and for the most part in the relation of employer with 
employe. The imprenditor buys raw materials 
and employs labourers for the purpose of making 
profits. He is a mere intermediate. If he is unable in mar- 
keting his products to make his receipts exceed his outlays, 
he withdraws from production, however social interests may 
thereby suffer. 

In the fall of prices following a panic not all commodities 
fall with equal rapidity. Goods from foreign sources, for 
example, may nearly or quite hold their old level of prices. 
Other products are perhaps produced under conditions more 
or less approaching monopoly ; others again may be well 
sustained in price, through speculative holdings by the pro- 
ducers or through restriction of product. The imprenditor 
must produce in view of market prices. Prices are his mas- 
ter. If his productive outlays are too high, he must withdraw 
from business. There is, however, for most employers one 
resource and one only — that of reducing wages. A small 
reduction may possibly be sufficient. But here is precisely 
the kernel of the difficulty. Even were raw materials for all 
industries falling regularly and equally, the imprenditor would 
still be compelled by lower prices of product to reduce the 
wages paid. As a practical fact, this is a difficult matter. 
Labourers resist angrily and persistently. They 
do not understand the necessity of the reduction tjo^ ^^^^ '^'^^^' 
— they believe that they have merely to stand 
firm. To prevent a strike or a long continuance of strained 
relations, the employer often finds it not less profitable and 
much more comfortable to close his shop. In times of depres- 
sion profits are scant enough at the best. 

Inertia is a fact which must be reckoned with. Wages rise 
slowly and when fall is inevitable fall slowly and with painful 



364 OUTLINES OF ECONOMIC THEORY 

struggle. Public opinion concurs with diCiculties in business 
to impel the factory owner to quit the contest. Competition 
among wage-seekers does not protect him. If the industry 
requires skilled labour, he cannot readily reman his factory — • 
the unemployed even are loath to present themselves for the 
vacant places. Ostracism is visited upon them if they do, and 
they are even prevented by force. 

301. Were it possible for prices to fall evenly all along 
the line, and for wages to be forced to fall in conformity with 
prices, the depression following upon panic would be unimpor- 
tant and of short duration. But (1) as long as indebtedness 
does not fall as measured in money units, there is tremendous 
resistance — in many cases a struggle for very financial ex- 
istence — against sale and liquidation at the ruling level of 
prices. Even were this difficulty avoided, as will be shown 
to be possible, there would still remain (2) the inequalities 
already mentioned in the fall of commodities generally. 
This, however, is not a very considerable matter. (3) The 

difficulty of accurately adjusting wage -pay- 
ments to market prices still remains. Capital, 
labour, and employer must cooperate in production. If with 
any employer labourers insist upon all, or more than all, of 
the product, production must cease. The marginal principle 
applies here in an important manner. Those employers 
hardest pushed by the demands of employes, or those least 
able or least disposed to continue production on narrow mar- 
gins, close the doors of their factories. A resulting increase 
in the competition of wage-earners for employment reduces in 
some measure the pressure upon the remaining employers. 

This analysis points to large advantages in the commodity 
standard of payments, especially as applied to attempts to fix 
upon a basis of agreement between employers and employes. 

302. The currency problem, as restated, is then to prevent 

a reduction in the social dividend by preserving 
The direction of f^Qj^ disaster the mechanism of exchange. Such 

remedy. ° 

remedy as is possible under the competitive 
system must be found in the discovery of a currency system 



POLITICAL ECONOMY AS AN ART 365 

practically flexible in time of need — a method by which legal 
tender or unsuspected currency can be made to take the place 
of ordinary credit when this will not perform its function. 

We shall be better able to estimate what is possible in this 
direction, after having examined some of the problems relating 
directly to paper currencies. 

It is to be deduced from the discussions in Sections 193-202 
that paper money should never be issued, even under stress 
of emergency, to such an extent as to exclude from currency 
uses, either for foreign export or for domestic commodity uses, 
the bullion portion of the currency, or to such an extent 
that, as a mere matter of numbers, the paper units cannot, by 
virtue solely of their legal tender power, hold their parity 
with bullion. 

303. The economy of wealth possible by use of paper 
money is now as generally admitted as the method is gener- 
ally practised. Several questions, however, present themselves 
in this connection. (1) Is the circulation of government 
issues possible without redeemability? (2) Is it ever advis- 
able? (3) Ought the government ever to do more than merely 
to regulate and supervise paper issues? (4) If the issue 
function is left with banks, what measure of sux^ervision and 
regulation is necessary? 

Questions (1) and (2) were sufficiently discussed in Sections 
193-202. Whether paper issues should be left exclusively 
to private enterprise, or in what degree if not 
exclusively, are more difficult questions. In ment issues^^™' 
favour of issues exclusively by banks, it is urged 
that, inasmuch as these rest upon bank credit, the government 
is released from the strain of this liability. Interconverti- 
bility — parity — would be guaranteed by the very system. All 
banks must fulfil this primary obligation as a condition to their 
existence. As soon as over-issue should approach, there would 
be increasing difficulty in keeping the paper money in circula- 
tion. Redemption would be demanded, and this fact Avould 
prevent the loss of parity between paper and bullion. 

304. On the other hand, it is ura:ed that there is no reason 



366 OUTLINES OF ECONOMIC THEORY 

for denying to the State the right of paper issues unless private 
interests are likely to perform the service better. The money 
function is one of purely social importance. Not only this, 
but the economies of wealth worked by paper issues, depend 
upon the manner of social organization and the established 
commercial and industrial methods. These economies are 
distinctly social economies. Good reason should be shown 
before turning them over to the conduct and profit of 
private interests. At best, government must superintend 
and regulate in any event, and in this degree at least become 
responsible. Deposit banking might possibly enough be left 
entirely without supervision, but the right of bank-note issues 
can hardly be exempt from state regulation. Otherwise the 
thing would be almost certain to be overdone, and might be 
made the occasion for deliberate and extended dishonesty. 
The experience of America in wild-cat banking furnishes an 
excellent illustration. The issue of money must in any event 
be so limited as to partake of monopoly features. Why turn 
it into private instead of public monopoly? Why restrict the 
function of government to the fixing of standards and to certi- 
fying the weight and fineness of the bullion presented to it 
for coinage? 

305. In which system lies the greater danger of over- 
issue? It must be admitted that the State has been found 
prone to excess in this direction, and it is perhaps true that 
the danger of excess is especially great under popular suffrage. 
On the other hand, if banks are unrestricted, the danger is 
equally great, indeed greater. The larger profit would come 
with the greater recklessness. Nor would it be a safeguard 
that all banks were held to strict terms of redemption. The 
call for redemption, following from a plethora of currency 
issues, would not be felt by those banks alone which had 
exceeded reasonable limits. Gold would be called for by 
holders of paper without regard to the bank of origin, unless 
indeed there were different ratings of value upon the issues 
of different banks, — a condition which could hardly be 
admitted as probable by advocates of bank issues. 



POLITICAL ECONOMY AS AN ART 367 

306. Not only this, but deposit banking is essentially a 
brokerage of credit, the bank serving as an intermediate and 
guarantor between lenders and borrowers. (Section 184.) In 
times of credit contraction, a severe strain is placed upon the 
bank, the borrowing customer calling shrilly for more accom- 
modation, and the depositing customer very possibly making 
demand for his deposit. In this pressure for legal tender 
currency, it is often impossible for a bank to retain enough of 
it to maintain cash payments to depositors. It follows, then, 
that bank-note currency is of fluctuating volume and value, 
unless some scheme of guaranty by government or some method 
of government control is adopted. Even then there is no cer- 
tainty that redeemability in bullion can be maintained, even 
by banks ultimately solvent. This fact has been several times 
demonstrated in the history of United States banking. (Sum- 
ner's History of American Currency, passim.) To preserve, 
therefore, the financial system from serious disaster at critical 
times, some form of governmental intervention seems to be 
necessary. At present all bank bills are secured 

by deposit of United States bonds, and are there- ° ^"^^^ ^^^ 
■J i- ' necessary. 

fore not subject to distrust. Possibly a scheme 
of cooperative guaranty would effect this equally well, as is 
proposed under the famous Baltimore plan. It needs be clearly 
understood, however, that while now in times of crisis banks 
fail from inability to pay their depositors, they are not now 
subjected to the necessity of cashing their own bills, nor are 
their gold reserves the reservoir from which gold for foreign 
shipment is necessarily drawn. Whenever for any reason a 
shipment of gold now becomes necessary, United States notes 
can be presented at the United States Treasury and the gold 
demanded. Retire this greenback volume, and this strain 
would be thrown on the banks, in proportion as their note 
circulation should have become considerable. Some authority 
then would have to be lodged in the banks to make larger issues 
in times of their own distress, or of distress of the public. 
This is practicable only upon the assumption that they have 
not already used this privilege to its limits. But panics com- 



368 OUTLINES OF ECONOMIC THEOEY 

monly occur as tlie result of inflation. In any system in which 
inflation is at all times possible, there will be small reserve 
power for panic necessities. 

307. But if, in fact, these objections can be met, it still 
remains true that the currency issuing function is a source of 
large profits and ought not to be turned over to private institu- 
tions gratuitously. Society merely claims its own in appro- 
priating the gains possible under this system. 

We still seek a system which shall reserve for times of 
emergency a large measure of safe elasticity, and which after 
the stress has passed shall automatically contract to its normal 
volume. Otherwise, in preventing a disastrous fall in prices 
from disappearing credit, there will later result a disastrous 
rise in prices when credit flows back into currency channels. 
That which was originally a corrective of contraction will 
operate as direct expansion. 

Methods followed by imperial banks in Europe offer a sug- 
gestion. In times of panic in London the Bank of England 
has several times, under the sanction of the 
bonds"'^^^'^ ^ ^ ministry, made large illegal issues of paper 
awaiting parliamentary approval. Ordinarily, 
hovfever, the mere announcement of authority to issue has 
sufficed to control the panic, without the necessity of actual 
issues. But in Germany the imperial bank is authorized at 
all times to enlarge its issues on terms of paying to the State 
so high a tax or fine as to insure the retirement of issues when 
the stress is passed. This method is not as readily practicable 
under a system like that of the United States, wanting any 
great central banking institution and wanting, also, any one 
banking centre of preeminent importance, but, on the contrary, 
made up of thousands of separate and independent banking 
institutions. However, the New York banks in the crisis of 
1893 followed, by purely voluntary association, in the issue 
through the clearing-house of the famous clearing-house 
receipts, the principles here advocated. But to be broadly 
effective all banks in reserve cities should be compelled to 
carry a certain proportion of their capital in government 



POLITICAL ECONOMY AS AN ART 369 

obligations bearing a low rate of interest, and should be 
entitled to receive upon demand from the United States 
Treasury, upon the deposit of these securities, approximately 
their par value, paying, however, to the government a rate 
of interest so high as to insure the retirement of the emergency 
issues when the exceptional demand was over. 



FREE COINAGE OF SILVER IN AMERICA 

308. A few propositions may now be taken as established. 

(1) The volume of exchanges furnishes the normal demand 
for currency. 

(2) Increase in the supply of currency, whether by coin, 
greenbacks, or credit, tends to depreciate the unit, that is, to 
raise prices. 

(3) The value of the unit, if made of coin, ultimately 
equals its marginal cost of production; that is to say, free 
coinage finally fixes the value of the unit at the value of the 
contained bullion (seigniorage is unimportant for this pur- 
pose). 

(4) If two metals are to circulate side by side, they must 
maintain exact market parity at the coinage ratio, else but one 
will circulate, and that the cheaper. 

(5) The use of gold as currency tends to enhance its mar- 
ket value, and has thereby greatly increased the amount 
produced. 

(6) Demonetization, partial or complete, of gold would, 
temporarily at least, lower its value and discourage produc- 
tion, till the over-supply had drained away. Ultimately its 
value would again come to coincide with its marginal cost of 
production. 

(7) The remonetization of silver would tend to raise its 
value and to stimulate its production, with the final outcome 
that the purchasing power of the unit would fix itself at the 
cost-of-production mark. 

2b 



370 OUTLINES OF ECONOMIC THEORY 

(8) It is then possible tliat the iree coinage of silver at 
any reasonable ratio should bring about a parity between gold 
and silver. If this ratio did not approximately correspond to 
the normal cost-of -production ratio, it would be short-lived in 
proportion as it was wide of this mark. 

Would silver coinage by the Caucasian nations at the ratio 
of 16 to 1 bring about either a temporary or a permanent 
parity? 

309. The total quantity of gold in actual circulation among 
the Caucasian peoples is about three and one-half billions 

of dollars. Bearing in mind the fact that an 
International inflow of silver would not displace gold, unit 

ratio of i6 to I. „ . , . ,, , . ^ 

for unit, because of the concurrent tendency 
of gold toward fall, it is evident that there is not in the 
world sufficient uncoined silver to displace all the gold. 
Parity would therefore result, attended by some measure of 
increase in the number of currency units. Recalling that the 
present output of silver, estimated at the ratio of 16 to 1, is 
over two hundred millions annually, and that this ratio vastly 
overvalues silver as measured by its cost of production, it is 
questionable whether this parity could long endure. An 
enormous stimulus would be given to silver production. Its 
inflow into currency uses would bring about a marked ten- 
dency toward rising prices. But even with a product of four 
hundred millions per year, several years would elapse before 
the parity would be disturbed. 

310. Attempting now a forecast of the results of free 
silver coinage limited to the United States, we find some- 
thing less than a half billion of gold in our 

National ratio present circulation. The stores of uncoined 

of l6 to I. ^ T T rr> 

silver in the world would probably be suin- 
cient immediately to overwhelm the parity. It would at 
best be destined to so short a life as to drive gold from 
circulation by speculative influences, thereby bringing about 
so sharp a contraction as to precipitate a panic. Were, 
however, the uncoined silver insufficient to break the parity, 
it is well to remember that the Bank of France alone com- 



POLITICAL ECONOMY AS AN ART 371 

monly carries sufficient silver to supply half our entire coin- 
age need, and the French people still more, if only permission 
could be obtained from the French government to sell us this 
silver for our gold, and to substitute in its reserves gold for 
silver, covering its apparent bookkeeping loss by paper issues. 
Five years later it could unload its gold and repurchase silver 
with a net gain, at our expense, of from two hundred to two 
hundred and fifty millions of dollars. In any event, our parity 
could endure but shortly. After the spasm of contraction 
due to the speculative disappearance of gold had passed, our 
prices would move upward and our gold, no longer required or 
used as currency, would flow abroad as a commodity export, in 
payment of adverse trade balances. 

311. After the disasters of a change from the gold to the 
silver standard are measured, there remain for consideration 
(1) the question of the justice of the change, (2) the inquiry 
whether we should be any better off with a new silver stand- 
ard than now with the gold standard. 

First, as to the justice of the change. We may admit, 
though it is not altogether clear, that the gold dollar has 
greatly appreciated in purchasing power within 
the past twenty years. Measured by the prices 
of 1896, this seems reasonably certain. But remember that 
not panic but normal prices furnish the just basis of estimate, 
since panics are not at all peculiar to the gold basis. We 
may also admit — and this is probably the fact — that had we 
followed the course of silver as our standard rather than gold, 
a less unjust standard of deferred payments would have been 
afforded. But in fact we did not do so, and seemingly from 
the outlook of twenty years ago would not have been justified 
in making the attempt. But these possibilities and probabili- 
ties are not much to the point. They are mere retrospect. 
Business has adjusted itself to conditions as we have estab- 
lished them, and not to conditions as they might have been. 
An appreciating standard of value is an injustice to debtors, in 
the measure only that appreciation has taken place during the 
term of the indebtedness. Suppose that your grocer has just 



372 OUTLINES OF ECONOMIC THEORY 

purchased a bill of goods in Cliicago and has borrowed the 
money from a banker to pay for the goods. If, when the 
note matures at the bank, he presents himself and requests 
that in justice his note be scaled down in proporti n to the 
appreciation which the dollar has undergone in the past twenty 
years, the bank will doubtless manifest the intense unreason- 
ableness and rapacity said to be characteristic of the money 
power. Should the grocer reply that he was merely insisting 
upon a rule just to debtors in general, and incidentally work- 
ing to his particular advantage, it would be necessary to exam- 
ine the grounds on which this general rule was advocated. 

312. If any appreciation has taken place, some injustice 
has resulted. But the question is one of comparison. Where 
the balance of justice lies is not a difficult matter to deter- 
mine. The question is whether the volume of indebtedness is 
for the most part long time or short time. The debts of whole- 
salers to manufacturers, of retailers to wholesalers, of cus- 
tomers to retailers, of retailers and business men to banks, of 
banks to their depositors, are all short time relations, or 
ought to be. At all events, no one should ask for a reduc- 
tion of his debts on the ground that he has defaulted in 
payment at maturity. Even with municipal, state, and gov- 
ernment bonds, and long time real estate mortgages, it is 
well to remember that transfers are constantly taking place. 
The last holder has himself invested money in payment of 
all the appreciation which had taken place before the time of 
purchase. It would be hard on him to make him responsible 
for all the appreciation which had accrued before his title was 
acquired. Why limit the time for which he is to be plundered 
to twenty years? Why not begin with the Christian era? 

313. It will be well to inquire upon whom the hardships 
of a cheaper standard of payment would chiefly fall. We are 
apt to assume that creditors are rich and debtors poor. But 
people who know how to use wealth often borrow of people 
who do not know as well. This is one way in which rich 
people get rich and keep rich. Bankers commonly show a 
preference for loaning their money to rich people and for bor- 



POLITICAL ECONOMY AS AN ART 373 

rowing it of the poor or middle classes. Savings-bank accu- 
mulations are derived from the same source. Insurance- 
company assets commonly belong to the same middle and 
poor classes. Manufacturers and Avholesalers are great 
borrowers; while banks and trust companies reckon large 
numbers of poor people among their stockholders as well as 
among their depositors. For every Eothschild there are mil- 
lions of savings-bank customers. 

314. "Whether gold or silver will furnish the fairer stand- 
ard of value for the future is impossible to decide. It is 
hard to foresee the developments in mining and discovery 
which will bear upon production; perhaps even more difficult 
than it was in 1873. Great stores of gold have lately been 
discovered in Africa and Colorado. The influence of this is 
evident in the tables of gold production which will shortly be 
given. That there are less pounds of gold than silver pro- 
duced per year does not greatly signify. There are more 
pounds of spring poems than of classic lyrics, but the whole 
stock of spring poems could be bought the more cheaply. 

315. When once the change from the gold to the silver 
standard had taken place, it is not clear that silver would be 
greatly inferior to gold as the basal money com- -^j^^^ ^^ ^^^ 
modity. The process of change would be at- change when 
tended with panic, followed by rising prices ™^ ^' 

and ending with still another and more severe panic. South 
America and Asia hold by the silver standard. There is no 
ground to believe that silver would be more subject to fluctua- 
tion in value than will gold. The greater weight of silver in 
proportion to its value would, however, increase the expense 
of shipment and thereby raise the cost of exchange. Also it 
is to be remembered that our trade is for the most part with 
nations which use the gold standard. The fluctuations of gold 
and silver relative to each other would, in considerable meas- 
ure, increase the hazards of business and would thereby result 
in a higher cost in transactions of international trade. 

316. The following table excellently illustrates many of 
the principles established in our discussion of currency: — 



374 



OUTLINES OF ECONOMIC THEORY 



Year. 


2 > 

€. 

o^ o 
•■g SO 

rt tn _ 


Commercial 
liatio of Values. 


of Gold. 
World's Product 


of Silver. Coin- 
age Value. 

Per Capita 
Effective Money. 


1852 . . 


4.87 


15.59 






1853 . . 


4.16 


15.33 










1854 . . 


5.08 


15.33 










1855 . . 


4.79 


15.38 










1856 . . 


4.40 


15.38 










1857 . . 


4.87 


15.27 










1858 . . 


5.21 


15.38 










1859 . . 


5.22 


15.19 










18(50 . . 


5.46 


15.29 










1861 . . 


5.96 


15.50 










1862 . . 


6.70 


15.35 










1863 . . 


7.28 


15.37 










1864 . . 


7.17 


15.37 










1865 . . 


6.85 


15.44 










1866 . . 


7.20 


15.43 










1867 . . 


7.77 


15.57 










1868 . . 


8.23 


15. .39 










1869 . . 


8.50 


15.60 










1870 . . 


9.05 


15.57 










1871 . . 


10.99 


15.57 










1872 . . 


12.68 


15.63 










1873 . . 


13.61 


15.92 


1131 


941 20.57 


1874 . . 


12.60 


16.17 


105 


96 21.09 


1875 . . 


13.19 


16.52 


103 


90 19.95 


1876 . . 


13.51 


17.94 


110 


97 19.14 


1877 . . 


11.36 


17.20 


114 


81 18.98 


1878 . . 


12.77 


17.94 


119 


95 19.83 


1879 . . 


14.11 


18.55 


107 


89 20.16 


1880 . . 


14.53 


18.06 


106 


97 23.05 


1881 . . 


15.83 


18.15 


103 


102 25.59 


1882 . . 


18.05 


18.19 


103 


112 26.04 


1883 . . 


19.32 


18.48 


95 


115 26.40 


1884 . . 


16.59 


18.56 


102 


HI 25.88 


1885 . . 


18.16 


18.92 


108 


118 26.11 


1886 . . 


17.47 


20.04 


106 


121 25.88 


1887 . . 


18.79 


21.02 


106 ] 


124 26.40 


1888 . . 


20.42 


21.59 


110 ] 


L41 26.66 


1889 . . 


20.64 


22.18 


L23 ] 


L62 25.46 


1890 . . 


22.98 


21.33 


120 ] 


L74 25.33 


1891 . . 


23.04 


19.83 ] 


131 ] 


L86 24.55 


1892 . . 




22.07 ] 


146 ] 


96 25.10 


1893 . . 




24.57 ] 


157 i 


J08 24.19 


1894 . . 






L72 





Quantities are given in millions. 



POLITICAL ECONOMY AS AN ART 



375 



These figures are mostly taken from the tables compiled by 
Maurice L. Muhleman, cashier of the United States Sub-treas- 
ury in New York. 

317. The following table throws light upon the mooted 
question as to the tendencies of the gold dollar in purchasing 
power during the last fifty years. These tables apply solely 
to European prices, but in a general way are valid for 
America. Comparing 1850 with 1890, no great appreciation 
has taken place. Prices have, however, considerably fallen, 
that is to say, the purchasing power of gold has increased 
since 1873: — 



Years. 


Sauerbeck. 


Sootbeer and Heintz. 


Krai. 


44 articles. 


141 articles. 


265 articles. 


1847-1850 


100 


100 


100 


1851-1860 


116 


116 


114 


1861-1870 


124 


123 


110 


1871-1875 


128 


133 


122 


1876-1880 


110 


123 


112 


1881-1883 


103 


122 


109 


1884 


94 


114 


101 


1885-1891 


87 


105 


101 



The unsatisfactory character of all tables of this sort was 
pointed out in Section 164. In a general way, however, the 
facts are probably correctly represented. According to these 
tables, the appreciation of gold has mostly taken place since 
1885. To say that through improved machinery and improved 
processes the fall in prices may be explained, does not deny 
the fall. 

The following table, compiled by Miss S. McLean Hardy, 
gives the movements of prices in America since 1860. The 
estimates are based upon 232 articles of merchandise, 100 
being used as the index number for 1860 : — 



1860 100 

1865 216.8 

1870 142.3 



1875 127.6 

1879 96.6 

1880 106.9 



1885. 
1890. 
1891. 



.93 

.92.3 
.92.2 



376 OUTLINES OF ECONOMIC THEOKY 

It is evident that in America also the purchasing power of 
gold has increased since 1873. The table of market values of 
silver, as compared with gold, indicates that silver has fallen 
somewhat more rapidly than have other commodities in the 
average. 

Kote in column (2), page 374, that the silver product in 

1852 was less than five times the weight of the gold product. 
In 1891 the annual product of silver was twenty-three times 
that of gold. The relative fall of silver is mostly explained 
by this fact. 

Note that at no time prior to 1874-1875, did silver become 
so cheap as to be worth less than one-sixteenth as much per 
ounce as gold. Until this time arrived, silver could not be 
coined on the 16 to 1 ratio. It had not, in fact, been coined 
in America since about 1834, otherwise than as token money. 

While France maintained the free coinage of both metals, it 
held to the ratio of 15i to 1. The discoveries of gold in Cali- 
fornia and Australia tended to raise the price of silver rela- 
tively to gold. As will be seen by the table, silver stood from 

1853 to 1867 so high relatively to gold that it was not coined 
in France till 1867. It was then coined enormously. The 
ratio of 15^ to 1 in France did not prevent a further fall, and 
after a few years had passed the United States could have 
coined it at 16 to 1, had its mints remained open to it. 

Note that the production of silver has enormously increased 
during the last twenty years, though upon a constantly falling 
market. 



THE END. 



INDEX 



(References are to Sections) 



Ability. See Taxation. 
Abstinence and Interest. See Interest. 
Agriculture. See Land and Rent. 
Alcoholic Drinks. See Taxation. 
Anarchy, Argument for, stated, 223, 

224. 
Apprentices. See Trades-unions. 
Average Man does not exist, 121. 

Bagehot, Walter, 118 n., 128 n. 
Banks, Statements, 183. 

Issues vs. Government Issues. See 
Currency. 
Barter, 168. 

Bastiat, Frederic, 128 n., 140n. 
Bimetallism, 203-206, 308-316. 

National, is impossible, 204. 

International, is possible, 205. 
See Currency. 
Birth-rate. See Population. 
Boehm-Bawerk, Eugene V., 44n., 55 n., 

60n., 114, 115 n., 119n., 140n. 
Booth, Charles, 251. 
Bounties, 161. 
Brassey, Thomas, 98. 
Brentano, Lujo, 128 n. 

Cairnes, John, 25 n., 135, 139, 221 n. 
Capital: Creation of, 106, 107. 

Defined, 100. 

Different Points of View, 100, 101. 

Intellectual, 8, 9, 10, 15, 100. 
See Interest. 
Carlyle, Thomas, 274 n. 
Child Labour, 290. 

Clark, J. B., 23 n., 44n., 128 n., 136 n., 
217 n., 274 n. 



Clearing-house, 184. 
Coin. See Currency. 
Coinage. See Currency. 
Collectivism. See Socialism. 
Combinations. See Monopoly. 
Commercial Crises. See Crises. 
Communism. See Socialism. 
Competitive System: Analyzed and 
Criticised, 147, 218-220. 

The Harmonies, 147, 221-223. 

The Dangers, 128. 

Production, 231-233. 

Distribution, 234, 235. 

Consumption, 236. 
Consumers' Quasi-rent, 39. 
Consumption, 236, 259-274. 

Related to Birth-rate. See Popula- 
tion. See Demand. 
Cooperation, 243-246. 
Corners. See Speculation. 
Cost of Production : a Question of Sac- 
rifice, 47, 48. 

Usual Statement, 52. 

Usual Statement criticised, 53. 

Demand the Ultimate Force, 54. 

Cost and Wages, 56-58. 

Cost and Interest, 59, 60. 

Cost and Rent, 82-86. 

Which is Cause, and which Effect? 
83-90. 
Courcelle-Seneuil, J. C, 7 n., 23 n., 28 n., 

55 n., 136 n., 140n. 
Credit : Its Functions, 170, 184. 

Relation to Capitalization, 104-107. 

Dangers. See Crises. 
Crises, 207, 298-300. 

Remedies, 302-307. 



377 



378 



INDEX 



Cultivation, Margin of. See Rent. 
Currency: Is Paper Money Wealth? 
103. 

Defective, as Standard of Payment, 
161. 

Standard should follow Utility, 162. 

Allowance for Standard of Life, 
165. 

A Mere Medium, 167. 

Necessary Qualities, 169. 

Credit one aspect of Exchange, 
170. 

Fluctuations in Volume of Ex- 
change, 171. 

Exchange and Division of Labour 
interdependent, 172, 179, 182, 
194. 

Volume, how fixed, 175-178. 

Quasi-rents and Currency, 179. 

The Option Feature, 181. 

Rapidity of Circulation, 183. 

Credit serves as Currency, 104, 170, 
184. 

Government Issues, 185. 

Gresham's Law, 186-192. 

Fiat Money, 185, 193-200. 

Quantity and not Material impor- 
tant, 199. 

Importance of Taxation, 200. 

Importance of Speculation, 201. 

See Bimetallism. 

See Crises. 

Silver Question, 212, 308-317. 

Multiple Standard, 297. 

Free Banking, 303-307. 

Interconvertible Bonds, 307. 

Decreasing Returns : Diminishing Re- 
turns. See Returns. 
Deferred Payments. See Currency. 
Demand : Is Primary Fact in Econom- 
ics, 88-90. 
Elasticity of, 79, 88-90. 
How related to Rent. See Rent. 
Explains Cost and Value, 54. 
Desire. See Demand. 
Distribution : Distinguished from Mer- 
chandising, 240, 243. 
Tendencies, 130, 131. 
Analysis, 123-127. 
Primarily a Question of Product, 
129. 



Distribution : Competitive System of. 

See Competition. 
Division of Labour, International. See 
International Trade. 
Relation to Currency. See Cur- 
rency. 
Aids Production, 23 n., 137, 140 n. 

Economics, Scope of, 1, 2. 

Definition of, 1. 

As Science and as Art, 2, 9, 34. 

Basis, 25-28. 
Economic Laws, Nature of, 3, 4. 

Factors in, 5-7. 

Motive in, 24, 28. 

Harmonies. See Competition. 
Education, Advantages, 7, 23 n. 
Eight-hour Day, 284. 
Eminent Domain. See Railroads. 
Employer. See Imprenditor. 
Entrepreneur. See Imprenditor. 
Environment. See Man and 
Ethics, Test in, 223, 224, 260, 261. 
Exchange: Is Productive, 37. 

Relation to Currency. See Cur- 
rency. 

Expansion, 211. 

See Currency. 
Export Duty, 143. 

Fashion, 133, 259-274. 

Franklin, Benjamin, 140 n., 274 n. 

Free Banking. See Currency. 

Free Silver. See Currency. 

Free Trade. See International Trade. 

Freewill and Scientific Law, 7. 

Freight. See Transportation. 

Garnier, Joseph, 99 n. 
George, Henry. See Taxation of Land. 
Giddings, F. H., 131 n. 
Gide, Charles, 44n., 131 n., 274n. 
Government, Justification for. See 
Laissez-faire. 
Functions of. See Laissez-faire. 
Gratuity, Relation to Value, 67. 

Harmonies. See Competition. 

Import Duty. See International 

Trade. 
Imports. See International Trade. 



INDEX 



379 



Imprenditor, 127, 128. 

Injustice from, 128. 

Profits of, 127. 

Relation to Wage-earner, 127. 

Point of Socialistic Attack, 241, 
242. 
Improvements. See Land. 
Income Tax. See Taxation. 
' Inertia of Labour and Capital, 140. 
Intellect. See Capital. 
Interest, Definition, 112. 

Source of, 109-112, 114. 

Determination, 117. 

Tendencies, 130. 

Imperfect ComiDetition, 115. 

Abstinence, 59. 

See Risk. 
International Trade, 137-146. 

As Division of Labour, 137. 

Quasi-rents in, 139. 

Inertia of Labour and Capital, 140. 

Monopoly Conditions, 140-142. 

Infant Industries, 145. 

Tax on .Foreigners, 144. 

Effects on Rents, 146. 

Prices and Currency Movements, 
190-192. 

Jevons, Stanley, 28n.,44n., 55 n., 60 
n., 168. 

King's, Gregory, Law, 79, 142 n. 

Labour. See Wages. 

Has value, how? 50. See Value. 

Unions. See Trades-unions. 
Laissez-faire examined, 223. 
Land, Fertility, 73. 

Diminishing Returns, 68. 

Improvements, 84. 

Tax on. See Taxation. 

See Rent. 
Loans. See Interest. 

Machinery. See Rent. See Wages. 
Malthus. See Population. 
Man, the Centre of Economics, 10, 
91. 

And Environment, 5-7, 28. 

What is Productive, 61. 

Average, 121. 
Margin of Cultivation. See Rent. 
Marginal Utility. See Utility. 



Marshall, Alfred, 32, 44 n., 55 n., 60 n., 
68, 68 n., 73, 81 n., 128n., 136n., 
160 n., 221 n. 
Mill, J. S., 136. 

Modern Era. See Competition. 
Monometallism. See Currency and 

Bimetallism. 
Money. See Currency. 
Monopolies, 147-152. 

Buyers, 152. 

Sellers, 149. 

Labourers. See Trades-unions. 

Causes, 142, 148. 

Evils, 149. 

See Municipal Ownership. 
Morality, Advantages, 15, 23 n. 
Multiple Standard,"297. 
Municipal Ownership, 248, 249. 

Nature. See Man and Environment. 
Needs. See Demand. 
Normal Value. See Value. 

Panics. See Crises. 

Paper Money. See Currency. 

Political Economy: Its Scope, 1. 

Definition, 1, 2. 

Attitude as a Science, 2. 

Attitude as an Art, 2. 

Character of its Laws, 3, 4. 

Basis, 15. 

Motive, 14-16. 
Population, 92-99, 252-258. 

And Rent, 68-69. 

And Labour-cost, 92. 

Malthusian Law, 94-97. 

Standard of Life and Birth-rate, 
252-260, 262, 263. See Fashion. ' 
Porter, Robert, 99 n. 
Price. See Cost of Production. 
Prices, Retail, 133. 
Production, is Creation of Utility, 61. 

See Cost of Production. 
Profits: Defined, 61, 62. 

Tendencies, 131. 

Fixation, 127. 

Absolute and Relative, 63. 

Distinguished from Wages, 64. 

See Risk. 

See Imprenditor. 
Profit-sharing, 247. 
Protection. See International Trade. 



383 



INDEX 



Quasi-rent, 39, 40, 76. 
In Interest, 117. 
Is Part of Profits, 117. 

Railroads, 248, 249. 

Discriminations, 249. 

State Control, 249. 

State Ownership, 249. 
Rent of Land, 67-81. 

Ricardian Theory stated, 68-70. 

Ricardian Theory modified, 72, 73. 

Demand, 79, 80. 

Urban Land, 80. 

Relation to Price. See Cost of 
Production. 

Diminishing Returns, 68. 

Margin of Cultivation, 70, 73, 75. 

Unearned Increment, 73, 81. 

Metliods, Machinery and Transpor- 
tation, 79, 80. 
Retail Prices, 133. 
Returns, 252. 

Decreasing, 68. 

Increasing, 132. 
Revenue. See Taxation. 
Ricardo. See Rent. 
Rich, Social Function of, 250, 251. 
Risk, and Profit, 66, 134. 

And Interest, 115, 119. 

See Speculation. 
Rogers, Tliorold, 60 n., 66 n., 99 n., 

142 n., 222 n. 
Roscher, Wilhelm, 44n., 55 n., 228n. 

Sacrifice. See Cost. See Motive. 

Salaries. See Wages. 

Say, Leon, 44 n. 

Science, Growth of, 14, 15. 

As Capital, 23 n. 
Selfishness, 15. 
Senior, N. W., 44n., 99 n. 
Services, 12. 

In Standard of Living, 164. 
Sidgwick, Henry, 23 n., 81 n., 104, 
119 n., 128 n., 131 n., 136 n., 
160 n., 226 n., 251. 
Silver. See Currency. 
Sismondi, J. C, 28 n. 
Smith, Adam, 7n. 
Socialism, 218-242. 

Ethical Argument, 223-226. 

Historical Argument, 227, 228. 



Socialism: Economic Argument, 229. 

See Competition. 
Speculation, 134-136. 

In Land, 136. See Taxation. 

See Risk. 

Corners, 136. 
Spencer, Herbert, 255. 
Standard of Life. See Population. 

See Demand. 
Standard of Payments. See Currency. 
Steam, New Era, 218. 
Strikes. See Labour-unions. 
Successions. See Taxation. 
Sumptuary Laws, 237. See Taxation. 
Survival of the Fittest. See Popula- 
tion. 

Tariff, Effect on Prices, 213-216. 

See International Trade. 
Taxation, 155-161. 

Incidence, 155-160. 

Income, 278. 

Expenditure, 278-280. 

Luxury, 159, 161 n. 

Vice, 159, 160. 

Land, 81, 159, 282, 283, 146. 

Inheritance, 279. 

Progressive, 249, 279. 

Paupers, 280. 

Direct and Indirect, 161 n. 

Double, 276. 

Faculty, 277. 
Trades-unions, 153, 154, 241, 245. 

Conditions of Success, 153. 

Effects, 153, 284, 285. 

Apprentices, 286. 
Transportation : Is Productive, 36,101. 

Modern Importance, 218. 

Incidence of Cost, 128. 

See International Trade. 

See Taxation. 

See Railroads. 

See Monopolies. 

See Municipal Ownership. 
Trusts. See Monopolies. 
Turgot, AnneR., 119 n. 

Undertaker. See Imprenditor. 
Unearned Increment. See Taxation 

on Land. 
Unemployed, 292-295, 300. 
Unions. See Trades-unions. 



INDEX 



881 



Utility, Defined, 8. 

Morally considered, 9. 
An Outside Fact, 10. 
Antagonism with Value, 34. 
Marginal, 30, 31, 39, 40. 

Value : Defined, 32, 37. 

Fixation, 38. 

Value and Cost. See Cost of Pro- 
duction. 

Antagonism with Utility, 34. 

Equals Marginal Utility, 36, 41. 

Normal, 91. 

Relation to Labour, 46-51, 120. 

Intrinsic, 15, 194. 
Vice. See Taxation. 

See Consumption. 

Wages : Defined, 61. 

Real and Nominal, 66 n. 
Fixation, 56-58, 121, 122. 



Wages: Tendencies, 131. 

Of Women, 122, 291. 

Relation to Rent, 146. 

A Result from Value, 121, 122. 

Eight-hour Day, 284, 285. 

Relation to Cost of Production, 
55-60. 

Sweating, 287-289. 

Children, 290. 

Unemployed, 292-295, 300, 301. 
Walker, F. A., 99 n., 131, 202, 274 n. 
Ward, Lester A., 261. 
Wealth : Defined, 10, 18. 

Different Points of View, 19-21, 
19 n. 

Materiality, 13. 

Growth of, 14. 

A Question of Correspondence, 22. 

Not always due to Labour, 23. 
Women, Labour, 291. 

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